Cross-section of option returns and volatility |
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Authors: | Amit Goyal Alessio Saretto |
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Institution: | 1. Goizueta Business School, Emory University, Atlanta, GA 30322, USA;2. Krannert School of Management, Purdue University, West Lafayette, IN 47907, USA |
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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. |
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Keywords: | G11 G13 G14 |
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