Firm fundamentals and the cross-section of implied volatility shapes

Ding Chen, Biao Guo and Guofu Zhou

Journal of Financial Markets, 2023, vol. 63, issue C

Abstract: With machine learning tools, we document that firm fundamentals have explanatory power on the shape of the option implied volatility (IV) curve that is both economically and statistically significant. We also find that, after accounting for fundamentals, the associated IV process can generate overreaction in the long-term IV with respect to change in the short-term IV, and can allow a positive profit from at-the-money straddle writing, explaining puzzling patterns in the literature. We also provide a simple model linking the IV to firm fundamentals, which permits realistic IV curves and is consistent with the empirical findings.

Keywords: Option implied volatility; Volatility skew; Firm fundamentals; Option puzzle; LASSO (search for similar items in EconPapers)
JEL-codes: C11 C12 C13 G11 G12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:63:y:2023:i:c:s1386418122000611

DOI: 10.1016/j.finmar.2022.100771

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