Fu, Xi and Arisoy, Y. Eser and Shackleton, Mark Broughton and Umutlu, Mehmet (2016) Option implied volatility measures and stock return predictability. Journal of Derivatives, 24 (1). pp. 58-78. ISSN 1074-1240
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Abstract
Using firm-level option and stock data, we examine the predictive ability of option-implied volatility measures proposed by previous studies and recommend the best measure using up-to-date data. Portfolio level analysis implies significant non-zero risk-adjusted returns on arbitrage portfolios formed on the call-put implied volatility spread, implied volatility skew, and realized-implied volatility spread. Firm-level cross-sectional regressions show that, the implied volatility skew has the most significant predictive power over various investment horizons. The predictive power persists before and after the 2008 Global Financial Crisis.