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Implied And Realized Volatility In The Cross-Section Of Equity Options

Author

Listed:
  • MANUEL AMMANN

    (University of St. Gallen, Swiss Institute of Banking and Finance, Rosenbergstrasse 52, CH-9000 St. Gallen, Switzerland)

  • DAVID SKOVMAND

    (Aarhus School of Business, Department of Business Studies, Fulsangs Allé 4, DK-8210 Aarhus V, Denmark and CREATES, Denmark)

  • MICHAEL VERHOFEN

    (University of St. Gallen, Swiss Institute of Banking and Finance, Rosenbergstrasse 52, CH-9000 St. Gallen, Switzerland)

Abstract

Using a complete sample of US equity options, we analyze patterns of implied volatility in the cross-section of equity options with respect to stock characteristics. We find that high-beta stocks, small stocks, stocks with a low-market-to-book ratio, and non-momentum stocks trade at higher implied volatilities after controlling for historical volatility. We find evidence that implied volatility overestimates realized volatility for low-beta stocks, small caps, low-market-to-book stocks, and stocks with no momentum and vice versa. However, we cannot reject the null hypothesis that implied volatility is an unbiased predictor of realized volatility in the cross section.

Suggested Citation

  • Manuel Ammann & David Skovmand & Michael Verhofen, 2009. "Implied And Realized Volatility In The Cross-Section Of Equity Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(06), pages 745-765.
    • Handle: RePEc:wsi:ijtafx:v:12:y:2009:i:06:n:s0219024909005440
    DOI: 10.1142/S0219024909005440
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    Citations

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    Cited by:

    1. Chuang, Wen-I & Huang, Teng-Ching & Lin, Bing-Huei, 2013. "Predicting volatility using the Markov-switching multifractal model: Evidence from S&P 100 index and equity options," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 168-187.
    2. Ryszard Kokoszczyński & Natalia Nehrebecka & Paweł Sakowski & Paweł Strawiński & Robert Ślepaczuk, 2010. "Option Pricing Models with HF Data – a Comparative Study. The Properties of Black Model with Different Volatility Measures," Working Papers 2010-03, Faculty of Economic Sciences, University of Warsaw.

    More about this item

    Keywords

    Implied volatility; realized volatility;

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