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Correlated implied volatility with jump and cross section of stock returns
Author(s) -
ZeTo Samuel
Publication year - 2016
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12111
Subject(s) - jump , forward volatility , volatility (finance) , econometrics , economics , implied volatility , realized variance , volatility risk premium , stochastic volatility , covariance , financial economics , volatility risk , volatility smile , stock (firearms) , volatility swap , mathematics , statistics , physics , geography , quantum mechanics , archaeology
I derive the option‐implied volatility allowing for nonzero correlation between price jump and diffusive risk to examine the information content of implied diffusive, jump risks and their implied covariance in the cross‐sectional variation of future returns. This study documents a strong predictive power of realized volatility and correlated implied volatility spread ( RV − IV C ) in the cross section of stock returns. The difference of realized volatility with the implied diffusive volatility ( RV − σ C ), jump risk ( RV − γ C ) and covariance ( RV − IC ov ) can forecast future returns. These RV − σ C and RV − γ C anomalies are robustly persistent even after controlling for market, size, book‐to‐market value, momentum and liquidity factors.