Why does options market information predict stock returns?

Dmitriy Muravyev, Neil D. Pearson and Joshua M. Pollet

Journal of Financial Economics, 2025, vol. 172, issue C

Abstract: Several influential studies show that transformations of implied volatilities calculated from options prices predict stock returns. This predictability is puzzling because market participants readily observe options prices. We find that this predictability is consistent with implied volatilities reflecting stock borrow fees that are known to predict stock returns. We derive a formula relating the option-implied volatility spread to the borrow fee. Motivated by this relation, we show that the return predictability from implied volatility spread and skew decreases by at least two-thirds if high-fee stocks are excluded. The patterns for other predictors computed from option implied volatilities are similar.

Keywords: Equity options; Put-call parity; Implied volatility spread; Implied volatility skew; Stock borrow fee; Stock lending fee (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001618

DOI: 10.1016/j.jfineco.2025.104153

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