A smiling bear in the equity options market and the cross-section of stock returns
- Authors
- Park, Haehean; Kim, Baeho; Shim, Hyeongsop
- Issue Date
- Nov-2019
- Publisher
- WILEY
- Keywords
- convexity; equity options; implied volatility; predictability; stock returns
- Citation
- JOURNAL OF FUTURES MARKETS, v.39, no.11, pp.1360 - 1382
- Journal Title
- JOURNAL OF FUTURES MARKETS
- Volume
- 39
- Number
- 11
- Start Page
- 1360
- End Page
- 1382
- URI
- https://scholarworks.bwise.kr/gachon/handle/2020.sw.gachon/883
- DOI
- 10.1002/fut.22000
- ISSN
- 0270-7314
- Abstract
- 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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