Working Paper: NBER ID: w19590
Authors: Byeongje An; Andrew Ang; Turan G. Bali; Nusret Cakici
Abstract: Stocks with large increases in call implied volatilities over the previous month tend to have high future returns while stocks with large increases in put implied volatilities over the previous month tend to have 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 which 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.
Keywords: stocks; options; implied volatilities; future returns; trading strategies
JEL Codes: C13; G10; G11; G12; G13; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in call implied volatilities (G19) | High future stock returns (G17) |
| Increase in put implied volatilities (G13) | Low future stock returns (G17) |
| Increase in call implied volatilities (G19) | Predictability of stock returns (G17) |
| Increase in put implied volatilities (G13) | Predictability of stock returns (G17) |