IMPLIED AND REALIZED VOLATILITY IN THE CROSS-SECTION OF EQUITY OPTIONS

Manuel Ammann (), David Skovmand () and Michael Verhofen ()
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Manuel Ammann: University of St. Gallen, Swiss Institute of Banking and Finance, Rosenbergstrasse 52, CH-9000 St. Gallen, Switzerland
David Skovmand: Aarhus School of Business, Department of Business Studies, Fulsangs Allé 4, DK-8210 Aarhus V, Denmark and CREATES, Denmark
Michael Verhofen: University of St. Gallen, Swiss Institute of Banking and Finance, Rosenbergstrasse 52, CH-9000 St. Gallen, Switzerland

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 06, 745-765

Abstract: Using a complete sample of US equity options, we analyze patterns of implied volatility in the cross-section of equity options with respect to stock characteristics. We find that high-beta stocks, small stocks, stocks with a low-market-to-book ratio, and non-momentum stocks trade at higher implied volatilities after controlling for historical volatility. We find evidence that implied volatility overestimates realized volatility for low-beta stocks, small caps, low-market-to-book stocks, and stocks with no momentum and vice versa. However, we cannot reject the null hypothesis that implied volatility is an unbiased predictor of realized volatility in the cross section.

Keywords: Implied volatility; realized volatility (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219024909005440

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