Open AccessStock Return Autocorrelation and Individual Equity Option Prices
Author(s) -
Fei Fang
Publication year - 2021
Publication title -
journal of business theory and practice
Language(s) - English
Resource type - Journals
eISSN - 2372-9759
pISSN - 2329-2644
DOI - 10.22158/jbtp.v9n1p51
Subject(s) - autocorrelation , econometrics , economics , stock (firearms) , volatility (finance) , financial economics , equity (law) , implied volatility , return on equity , stock exchange , statistics , mathematics , finance , geography , archaeology , political science , law
This study demonstrates empirically the impact of stock return autocorrelation on the prices of individual equity option. The option prices are characterized by the level and slope of implied volatility curves, and the stock return autocorrelation is measured by variance ratio and first-order serial return autocorrelation. Using a large sample of U.S. stocks, we show that there is a clear link between stock return autocorrelation and individual equity option prices: a higher stock return autocorrelation leads to a lower level of implied volatility (compared to realized volatility) and a steeper implied volatility curve. The stock return autocorrelation is more important in explaining the level of implied volatility curve for relatively small stocks. The relation between stock return autocorrelation and option price structure is more pronounced when market is volatile, especially during financial crisis. The stock return autocorrelation is more important in explaining the level of implied volatility curve for relatively small stocks. Thus, stock return autocorrelation can help differentiate the price structure across individual equity options.