What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns?

Journal of Financial and Quantitative Analysis - Tập 45 Số 3 - Trang 641-662 - 2010
Yuhang Xing1, Xiaoyan Zhang2, Rui Zhao3
1Jones School of Management, Rice University, 6100 Main St., Houston, TX 77005. [email protected]
2Sage Hall, Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853. [email protected]
3Blackrock Inc., 40 E. 52nd St., New York, NY 10022. [email protected]

Tóm tắt

AbstractThe shape of the volatility smirk has significant cross-sectional predictive power for future equity returns. Stocks exhibiting the steepest smirks in their traded options underperform stocks with the least pronounced volatility smirks in their options by 10.9% per year on a risk-adjusted basis. This predictability persists for at least 6 months, and firms with the steepest volatility smirks are those experiencing the worst earnings shocks in the following quarter. The results are consistent with the notion that informed traders with negative news prefer to trade out-of-the-money put options, and that the equity market is slow in incorporating the information embedded in volatility smirks.

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Thông tin xuất bản

Journal of Financial and Quantitative Analysis

Tập 45 Số 3

641-662

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