Option‐implied moments and the cross‐section of stock returns

Abstract

We construct a joint score measure using option‐implied volatility, skewness, and kurtosis gauging investors' expectations about favorable future return distribution properties. The high–low decile portfolio formed on this measure earns a statistically significant 0.75% value‐weighted average monthly return. Risk‐adjusted returns are significant and robust when controlling for various characteristics. The positive abnormal return of the spread portfolio can be explained by its exposure to aggregate volatility risk when investors' sentiment is low. When sentiment is high, it is also driven by information flow from the options to the stock market for stocks perceived to be as relatively mispriced.

Option‐Implied Ambiguity and Equity Return Predictability

“…The first explores option-implied information as an effective predictor of stock returns. For instance, implied volatility often forecasts the equity premium (see, e.g., Yan 2011;Metaxoglou and Smith 2017;Kim and Park 2018;Jeon, Seo, and Kim 2020;Yang, Zhou, and Cheng 2020;Cao, Simin, et al 2020;Cao, Ruan, et al 2020;Alexiou and Rompolis 2022;Chen et al 2022;Shi, Shi, and Ying 2024). Furthermore, the option-implied skewness also has predictive power for future stock returns (see, e.g., Conrad, Dittmar, and Ghysels 2013;Aboura and Maillard 2016;Stilger, Kostakis, and Poon 2017;Kim and Park 2018;Chordia, Lin, and Xiang 2021).…”

Early exercise, implied volatility spread and future stock return: Jumps bind them all

“…In Bali and Hovakimian (2009), the predictor variable is the difference between stock's realized and implied volatilities. In contrast, Conrad et al (2013), Chordia et al (2021) and Alexiou and Rompolis (2022) show that option‐implied moments can also predict future returns. We contribute to this literature by identifying a new predictor: the excess put early exercise premium.…”