THE PREDICTABILITY OF STOCK RETURNS USING THE INFORMATION OF IMPLIED VOLATILITY SKEW

10.6291/AIAPM.202212_(11).0004

Meng-Chien Chen；Han-Hsing Lee

Options ； Volatility Smirk ； Implied Volatility Skew ； Delta

Advances in Investment Analysis and Portfolio Management

11期（2022 / 12 / 01）

83 - 114

英文

This paper examines the predictive ability of various option skew measures on future equity returns, especially in the time period after the 2008 global financial crisis, and finds that the trading profits for individual skews have been declining in recent years. Strategies based on the modified portfolio formation and combined option skew measures can significantly enhance profits, indicating that option skew still contains exploitable information and that publicly available information extracted from traded equity options holds valuable information for future stock returns.

1. Amihud, Y.(2002).Illiquidity and stock returns: Cross-section and time-series effects.Journal of Financial Markets,5,31-56.
2. Baker, M.,Wurgler, J.(2006).Investor sentiment and the cross-section of stock returns.The Journal of Finance,61,1645-1680.
3. Bali, T.,Hovakimian, A.(2009).Volatility spreads and expected stock returns.Management Science,55,1797-1812.
4. Baltussen, G.,van der Grient, B.,de Groot, W.,Hennink, E.,Zhou, W.(2012).Exploiting option information in the equity market.Financial Analysts Journal,68(4),56-72.
5. Bates, D.(2000).Post-’87 crash fears in the S&P 500 futures option market.Journal of Econometrics,94,181-238.
6. Black, F.(1975).Fact and fantasy in the use of options.Financial Analysts Journal,31(4),36-41.
7. Blau, B. M.,Nguyen, N.,Whitby, R. J.(2014).The information content of option ratios.Journal of Banking & Finance,43,179-187.
8. Cao, J.,Goyal, A.,Xiao, X.,Zhan, X.(2020).Implied volatility changes and corporate bond returns.Management Science,69,1375-1397.
9. Carhart, M.(1997).On persistence in mutual fund performance.The Journal of Finance,52,57-82.
10. Chordia, T.,Subrahmanyam, A.,Tong, Q.(2014).Have capital market anomalies attenuated in the recent era of high liquidity and trading activity?.Journal of Accounting & Economics,58,41-58.
11. Cremers, M.,Weinbaum, D.(2010).Deviations from put-call parity and stock return predictability.Journal of Financial and Quantitative Analysis,45,335-367.
12. David, A.,Veronesi, P.(2009).,Calgary, Canada:University of Calgary.
13. Doran, J. S.,Krieger, K.(2010).Implications for asset returns in the implied volatility skew.Financial Analysts Journal,66(1),65-76.
14. Fama, E. F.,French, K. R.(1993).Common risk factors in the returns on stocks and bonds.Journal of Financial Economics,33,3-56.
15. Ge, L.,Lin, T.-C.,Pearson, N. D.(2015).Why does the option to stock volume ratio predict stock returns?.Journal of Financial Economics,120,601-622.
16. Hull, J. C.,Nelken, I.,White, A. D.(2004).Merton’s model, credit risk and volatility skews.Journal of Credit Risk,1(1),9-25.
17. Jia, X.,Ruan, X.,Zhang, J.(2021).The implied volatility smirk of commodity options.The Journal of Futures Markets,41,72-104.
18. Johnson, T. L.,So, E. C.(2012).The option to stock volume ratio and future returns.Journal of Financial Economics,106,262-286.
19. Kim, J. B.,Lu, L. Y.,Yu, Y.(2019).Analyst coverage and expected crash risk: Evidence from exogenous changes in analyst coverage.The Accounting Review,94,345-364.
20. Lin, T.-C.,Lu, X.(2015).Why do options prices predict stock returns? Evidence from analyst tipping.Journal of Banking & Finance,52,17-28.
21. Mixon, S.(2011).What does implied volatility skew measure?.The Journal of Derivatives,18(4),9-25.
22. Pan, J.,Poteshman, A.(2006).The information in option volume for future stock prices.The Review of Financial Studies,19,871-908.
23. Park, H.,Kim, B.,Shim, H.(2019).A smiling bear in the equity options market and the cross‐section of stock returns.The Journal of Futures Markets,39,1360-1382.
24. Roll, R.,Schwartz, E.,Subrahmanyam, A.(2010).O/S: The relative trading activity in options and stock.Journal of Financial Economics,96,1-17.
25. Xing, Y.-H.,Zhang, X.-Y.,Zhao, R.(2010).What does individual option volatility smirk tell us about future equity returns?.Journal of Financial and Quantitative Analysis,45,641-662.
26. Zhang, J.(2018).Informed options trading prior to dividend change announcements.Financial Management,47,81-103.