The Behavior of Volatility Expectations and Their Effects on Expected Returns
AbstractThis article examines the behavior of common stock return volatility forecasts implied by call option prices and studies the relationship between implied volatilities and stock returns. The author estimates a model that integrates the findings of previous theoretical and empirical research. The author finds that implied. volatilities are significantly positively related to forecasts of market return volatility and to recent realizations of stock and market volatilities. The author's model is able to capture much of the previously unexplained cross-sectional and serial correlation in implied volatilities. Moreover, stock returns are found to be significantly positively related to lagged implied volatilities. Copyright 1993 by University of Chicago Press.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 66 (1993)
Issue (Month): 1 (January)
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Web page: http://www.journals.uchicago.edu/JB/
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- Grunbichler, Andreas & Longstaff, Francis A., 1996. "Valuing futures and options on volatility," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 985-1001, July.
- Mixon, Scott, 2009. "Option markets and implied volatility: Past versus present," Journal of Financial Economics, Elsevier, vol. 94(2), pages 171-191, November.
- Lin, Jyh-Horng, 2000. "A contingent claim analysis of a rate-setting financial intermediary," International Review of Economics & Finance, Elsevier, vol. 9(4), pages 375-386, October.
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- Sadayuki Ono, 2007. "Option Pricing under Stochastic Volatility and Trading Volume," Discussion Papers 07/05, Department of Economics, University of York.
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