We examine whether time variation in the comovements of daily stock and Treasury bond returns can be linked to measures of stock market uncertainty, specifically the implied volatility from equity index options and detrended stock turnover. From a forward-looking perspective, we find a negative relation between the uncertainty measures and the future correlation of stock and bond returns. Contemporaneously, we find that bond returns tend to be high (low) relative to stock returns during days when implied volatility increases (decreases) substantially and during days when stock turnover is unexpectedly high (low). Our findings suggest that stock market uncertainty has important cross-market pricing in-fluences and that stock-bond diversification benefits increase with stock market uncertainty.

We study the dynamic relation between daily stock returns and daily innovations in optionderived implied volatilities. By simultaneously analyzing innovations in index- and firmlevel implied volatilities, we distinguish between innovations in systematic and idiosyncratic volatility in an effort to better understand the asymmetric volatility phenomenon. Our results indicate that the relation between stock returns and innovations in systematic volatility (idiosyncratic volatility) is substantially negative (near zero). These results suggest that asymmetric volatility is primarily attributed to systematic market-wide factors rather than aggregated firm-level effects. We also present evidence that supports our assumption that innovations in implied volatility are good proxies for innovations in expected stock volatility.

We find that the market’s recent cross-sectional dispersion in stock returns is positively related to the subsequent value book-to-market premium and negatively related to the subsequent momentum premium. The partial relation between return dispersion (RD) and the subsequent value and momentum premiums remains strong when controlling for macroeconomic state variables suggested by the literature. Our findings are consistent with recent theoretical insights and empirical evidence that suggest that the market’s RD may serve as a leading countercyclical state variable, that the value premium is countercyclical, and that the momentum premium is procyclical.

We jointly investigate time-varying comovements between stock returns across countries and between long-term government bond and stock returns within countries. Our focus is on how daily return comovements vary with stock uncertainty, as measured by the implied volatility (IV) from equity index options. Cross-country stock return comovements tend to be stronger (weaker) following high (low) IV days and on days with large (small) changes in IV. Stock-bond return comovements tend to be substantially positive (negative) following low (high) IV days and on days with small (large) changes in IV. A regime-switching analysis also indicates a striking temporal commonality in the stock-stock and stock-bond comovement variations. Our findings bear on understanding the influence of time-varying uncertainty on price formation and the diversification benefits of stock-bond and cross-country stock holdings. r

We document new patterns in the dynamics between stock returns and trading volume. Speci¢cally, we ¢nd substantial momentum (reversals) in consecutive weekly returns when the latter week has unexpectedly high (low) turnover. This pattern is evident in equity indices, index futures, and individual stocks. Similarly, we also ¢nd that the autocorrelation in equity-index returns is increasing with the unexpected dispersion across the latter week's ¢rm-level returns. Weeks with extreme turnover and dispersion shocks (both high and low) tend to have more macroeconomic news releases. Our ¢ndings bear on understanding price formation and the economic interpretation of turnover and dispersion shocks.IN THIS PAPER, we document new patterns in the dynamics between stock returns and trading volume. Speci¢cally, we ¢nd substantial momentum in consecutive weekly stock returns when the latter week has abnormally high turnover. 1 Conversely, we ¢nd substantial reversals in consecutive weekly returns when the latter week has abnormally low turnover. By abnormal turnover, we mean the shock in the turnover time series after controlling for its autoregressive properties and for normal movements with the market return. 2 We ¢nd this return pattern in equity indices, index futures, individual stocks, and in the U.S., Japan, and U.K. stock markets.

616 Mayhew and StiversFirst, the results indicate that the ability of implied volatility to subsume all relevant information about conditional variance depends on option trading volume. For the most active options in the sample, implied volatility reliably outperforms GARCH and subsumes all information in return shocks beyond the first lag. For these active options, implied volatility performs substantially better than indicated by the prior results of Lamoureux and Lastrapes (1993), despite significant methodological improvements in the time-series volatility models in this study including the use of highfrequency intraday return shocks. For the lower option-volume firms in the sample, the performance of implied volatility deteriorates relative to time-series volatility models. Finally, compared to a time-series approach, the implied volatility of equity index options provides reliable incremental information about future firm-level volatility. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:615-646, 2003 INTRODUCTIONOver the past few decades, there has been a vast quantity of research dedicated to modeling the joint dynamics of stock returns and volatility. It is now widely recognized that volatility varies substantially over time, and that volatility changes are persistent and somewhat predictable Harvey & Whaley, 1992;Schwert, 1989). It is also widely accepted that option prices incorporate forward-looking information that helps forecast future volatility (Christensen & Prabhala, 1998;Day & Lewis, 1992;Fleming, 1998;Lamoureux & Lastrapes, 1993).An important question is whether option prices subsume all relevant information about future volatility, or whether additional information can be gleaned by applying time-series models to historical data. There is now a sizable literature addressing this topic in the context of market-level volatility and S&P 500 or S&P 100 Index options. Some of the first authors to look at index options, including Day and Lewis (1992) and Canina and Figlewski (1993), suggested that historical data contains important information that is not incorporated into index option prices. However, most subsequent studies have concluded that the implied volatility from index options captures most, if not all, of the relevant information in the historical data (Blair et al., 2001;Christensen & Prabhala, 1998;Fleming, 1998; and the survey article by Poon & Granger, 2001).In contrast, individual stock options have received scant attention. A few early studies examined individual stock options (e.g., Chiras & Manaster, 1978; Latané & Rendleman, 1976). These early results tended to favor implied volatility, but the results are less than compelling because these articles predate the development of conditional heteroskedasticity models and employed naive models of historical volatility. Since then, Information Content of Implied Volatility 617 only one major article examines the forecasting power of implied volatility for individual stock options in a modern, time-series framework-that of Lamoureux an...

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