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The Joint Cross Section of Stocks and Options
Author(s) -
AN BYEONGJE,
ANG ANDREW,
BALI TURAN G.,
CAKICI NUSRET
Publication year - 2014
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/jofi.12181
Subject(s) - decile , predictability , economics , volatility (finance) , financial economics , econometrics , stock (firearms) , implied volatility , mathematics , geography , statistics , archaeology
Stocks with large increases in call (put) implied volatilities over the previous month tend to have high (low) future returns. Sorting stocks ranked into decile portfolios by past call implied volatilities produces spreads in average returns of approximately 1% per month, and the return differences persist up to six months. The cross section of stock returns also predicts option implied volatilities, with stocks with high past returns tending to have call and put option contracts that exhibit increases in implied volatility over the next month, but with decreasing realized volatility. These predictability patterns are consistent with rational models of informed trading.