Deviations from put-call parity contain information about future stock returns. Using the difference in implied volatility between pairs of call and put options to measure these deviations, we find that stocks with relatively expensive calls outperform stocks with relatively expensive puts by 50 basis points per week. We find both positive abnormal performance in stocks with relatively expensive calls and negative abnormal performance in stocks with relatively expensive puts, which cannot be explained by short sale constraints. Rebate rates from the stock lending market directly confirm that our findings are not driven by stocks that are hard to borrow. The degree of predictability is larger when option liquidity is high and stock liquidity low, while there is little predictability when the opposite is true. Controlling for size, option prices are more likely to deviate from strict put-call parity when underlying stocks face more information risk. The degree of predictability decreases over the sample period. Our results are consistent with mispricing during the earlier years of the study, with a gradual reduction of the mispricing over time.

We examine the pricing of both aggregate jump and volatility risk in the cross-section of stock returns by constructing investable option trading strategies that load on one factor but are orthogonal to the other. Both aggregate jump and volatility risk help explain variation in expected returns. Consistent with theory, stocks with high sensitivities to jump and volatility risk have low expected returns. Both can be measured separately and are important economically, with a two-standard-deviation increase in jump (volatility) factor loadings associated with a 3.5% to 5.1% (2.7% to 2.9%) drop in expected annual stock returns.AGGREGATE STOCK MARKET volatility varies over time. This has important implications for asset prices in the cross-section and is the subject of much recent research (e.g., Ang et al. (2006)).1 There is also evidence that aggregate jump risk is time-varying. For example, Bates (1991) shows that out-of-themoney puts became unusually expensive during the year preceding the crash of October 1987. His analysis reveals significant time variation in the conditional expectations of jumps in aggregate stock market returns. Santa-Clara and Yan (2010) use option prices to calibrate a model in which both the volatility of the diffusion shocks and the intensity of the jumps are allowed to change over time. They likewise find substantial time variation in the jump intensity process, with aggregate implied jump probabilities ranging from 0% to over 99%. * Cremers is at Mendoza College of Business, University of Notre Dame. Halling is at Stockholm School of Economics, University of Utah. Weinbaum is at Whitman School of Management, Syracuse University. The authors thank Gurdip Bakshi, Turan Bali, Hank Bessembinder, Oleg Bondarenko, Nicole Branger, Fousseni Chabi-Yo (WFA discussant), Joseph Chen, Magnus Dahlquist, James Doran, Wayne Ferson, Fangjian Fu, Kris Jacobs, Chris Jones, Nikunj Kapadia, Christian Schlag, Grigory Vilkov (EFA discussant), Shu Yan, Yildiray Yildirim, Hao Zhou, and seminar participants at Boston University, ESMT Berlin, Imperial College London, Stockholm School of Economics, the 2013 IFSID and Bank of Canada conference on tail risk and derivatives, the 21st Annual Conference on Financial Economics and Accounting (CFEA) at the University of Maryland, the 12th Symposium on Finance, Banking and Insurance, the 2012 WFA Meetings, and the 2012 EFA Meetings for helpful comments and discussions. The authors are grateful to two anonymous referees, an anonymous Associate Editor, and Campbell Harvey, the Editor, for helpful suggestions that greatly improved the paper. The authors are responsible for any errors.1 Considerable research examines the time-series relation between aggregate stock market volatility and expected market returns. See, for example, Bali (2008), Campbell and Hentschel (1992), and Glosten, Jagannathan, and Runkle (1993). DOI: 10.1111/jofi.12220 578The Journal of Finance R While they examine the time-series relation between systematic jump risk and expected stock marke...

Individual stock-option prices and credit spreadsCremers, M.; Driessen, J.J.A.G.; Maenhout, P.; Weinbaum, D. General rightsIt is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), other than for strictly personal, individual use, unless the work is under an open content license (like Creative Commons). Disclaimer/Complaints regulationsIf you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library: http://uba.uva.nl/en/contact, or a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible. AbstractThis paper introduces measures of volatility and jump risk that are based on individual stock options to explain credit spreads on corporate bonds. Implied volatilities of individual options are shown to contain useful information for credit spreads and improve on historical volatilities when explaining the cross-sectional and time-series variation in a panel of corporate bond spreads. Both the level of individual implied volatilities and (to a lesser extent) the implied-volatility skew matter for credit spreads. Detailed principal component analysis shows that a large part of the time-series variation in credit spreads can be explained in this way.JEL Classification: G12 ; G13

We use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors’ incentive structure is related to fund performance. Ownership of both independent and nonindependent directors plays an economically and statistically significant role. Funds in which directors have low ownership, or “skin in the game,” significantly underperform. We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with fund shareholder interests. Second, directors may have superior private information on future performance. We find evidence in support of the first and against the second mechanism.