Option Returns and the Cross-Sectional Predictability of Implied Volatility

摘要

We study the cross-section of realized stock option returns and find an economically important source of predictability in the cross-sectional distribution of implied volatility. A zero-cost trading strategy that is long (short) in straddles with a large positive (negative) forecast of the change in implied volatility forecast produces an economically important and statistically significant average monthly return. The results are robust to different market conditions, to firm risk-characteristics, to various industry groupings, to options liquidity characteristics, and are not explained by linear factor models. Compared to the market prediction, the implied volatility estimate obtained from the cross-sectional forecasting model is a more precise and efficient estimate of future realized volatility.