Options-Implied Variance and Future Stock Returns
77 Pages Posted: 21 Mar 2011 Last revised: 17 May 2014
There are 2 versions of this paper
Options-Implied Variance and Future Stock Returns
Date Written: February 1, 2014
Abstract
Using options-implied variance, a forward-looking measure of conditional variance, we revisit the debate on the idiosyncratic risk-return relation. In both cross-sectional (for individual stocks) and time-series (for the market index) regressions, we find a negative relation between options-implied variance and future stock returns. Consistent with Miller’s (1977) divergence of opinion hypothesis, the negative relation gets stronger (1) for stocks with more stringent short-sale constraints or (2) when shorting stocks becomes more difficult. Moreover, the negative correlation of realized idiosyncratic variance or analyst forecast dispersion with future stock returns mainly reflects their close correlation with our conditional idiosyncratic variance measure.
Keywords: stock return predictability, implied variance, realized variance, CAPM and ICAPM
JEL Classification: G1
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Cross-Section of Volatility and Expected Returns
By Andrew Ang, Robert J. Hodrick, ...
-
The Cross-Section of Volatility and Expected Returns
By Andrew Ang, Robert J. Hodrick, ...
-
By Amit Goyal and Pedro Santa-clara
-
Stocks as Lotteries: the Implications of Probability Weighting for Security Prices
By Nicholas Barberis and Ming Huang
-
Stocks as Lotteries: The Implications of Probability Weighting for Security Prices
By Nicholas Barberis and Ming Huang
-
Equity Portfolio Diversification
By Alok Kumar and William N. Goetzmann
-
Equity Portfolio Diversification
By Alok Kumar and William N. Goetzmann
-
Idiosyncratic Risk and Security Returns
By Yexiao Xu and Burton G. Malkiel
-
High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence
By Andrew Ang, Robert J. Hodrick, ...
-
High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence
By Xiaoyan Zhang, Andrew Ang, ...