We propose a measure for the convexity of an option-implied volatility curve, IV convexity, as a forward-looking measure of risk-neutral tail-risk contribution to the perceived variance of underlying equity returns. Using equity options data for individual US-listed stocks during 2000-2013, we find that the average realized return differential between the lowest and highest IV convexity quintile portfolios exceeds 1% per month, which is both economically and statistically significant on a risk-adjusted basis. Our empirical findings indicate the contribution of informed options trading to price discovery in terms of the realization of tail-risk aversion in the stock market.

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This study investigates the cross‐sectional implication of informed options trading across different strikes and maturities. We explore the term structure perspective of the one‐way information transmission from options markets to stock markets by adopting well‐known option‐implied volatility measures to examine stock return predictability. Using equity options data for U.S. listed stocks spanning 2000–2013, we find that the shape of the long‐term implied volatility curve exhibits extra predictive power for stock returns of subsequent months even after orthogonalizing the short‐term components. Our findings indicate that the inter‐market information asymmetry rapidly disappears before the expiration of long‐term option contracts.

Baker and Wurgler identify high sentiment betas with small startup firms that have great growth potential. On the surface, cryptocurrencies share important features in common with high sentiment beta stocks. This paper investigates the degree to which, during the period July 18, 2010–February 26, 2018, the return to bitcoin displayed the characteristics of a high sentiment beta stock. Using a sentiment‐dependent factor model, the analysis indicates that in large measure, bitcoin returns resembled returns to high sentiment beta stocks. Additionally, we show that bitcoin's expected returns are low when sentiment measured by Volatility Index is high while expected returns are high when sentiment is low.

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