Cross-section of option returns and volatility

Amit Goyal and Alessio Saretto

Journal of Financial Economics, 2009, vol. 94, issue 2, 310-326

Abstract: We study the cross-section of stock option returns by sorting stocks on the difference between historical realized volatility and at-the-money implied volatility. We find that a zero-cost trading strategy that is long (short) in the portfolio with a large positive (negative) difference between these two volatility measures produces an economically and statistically significant average monthly return. The results are robust to different market conditions, to stock risks-characteristics, to various industry groupings, to option liquidity characteristics, and are not explained by usual risk factor models.

Keywords: Option; returns; Historical; volatility; Implied; volatility; Overreaction (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (100)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:94:y:2009:i:2:p:310-326

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