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Real Options, Volatility, and Stock Returns
Author(s) -
GRULLON GUSTAVO,
LYANDRES EVGENY,
ZHDANOV ALEXEI
Publication year - 2012
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2012.01754.x
Subject(s) - volatility (finance) , economics , stock (firearms) , financial economics , implied volatility , econometrics , volatility swap , volatility smile , monetary economics , mechanical engineering , engineering
We provide evidence that the positive relation between firm‐level stock returns and firm‐level return volatility is due to firms’ real options. Consistent with real option theory, we find that the positive volatility‐return relation is much stronger for firms with more real options and that the sensitivity of firm value to changes in volatility declines significantly after firms exercise their real options. We reconcile the evidence at the aggregate and firm levels by showing that the negative relation at the aggregate level may be due to aggregate market conditions that simultaneously affect both market returns and return volatility.