Option-implied Value-at-Risk and the cross-section of stock returns

Based on a novel rescaled option-implied Value-at-Risk (rVaR) measure, we show that option-implied information is priced differently depending on whether it is based on options with strikes close to the current price of the underlying or far-out-of-the-money options. If the rVaR is estimated from options close-to-the-money, i.e., the 50% rVaR, stocks with high risk outperform stocks with low risk by 0.60% per month, in line with downside risk-averse investors. In contrast, if rVaR is estimated from far-out-of-the-money options, i.e., the 90% rVaR, stocks with high risk underperform stocks with low risk by 0.42% per month, implying that stocks with low risk have higher returns in the cross-section of returns. Our results are consistent with investors who prefer reliable information over unreliable information and explain contradictory results of prior studies.