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Why does options market information predict stock returns?

Author

Listed:
  • Muravyev, Dmitriy
  • Pearson, Neil D.
  • Pollet, Joshua M.

Abstract

Several influential studies show that transformations of implied volatilities calculated from options prices predict stock returns. This predictability is puzzling because market participants readily observe options prices. We find that this predictability is consistent with implied volatilities reflecting stock borrow fees that are known to predict stock returns. We derive a formula relating the option-implied volatility spread to the borrow fee. Motivated by this relation, we show that the return predictability from implied volatility spread and skew decreases by at least two-thirds if high-fee stocks are excluded. The patterns for other predictors computed from option implied volatilities are similar.

Suggested Citation

  • Muravyev, Dmitriy & Pearson, Neil D. & Pollet, Joshua M., 2025. "Why does options market information predict stock returns?," Journal of Financial Economics, Elsevier, vol. 172(C).
    • Handle: RePEc:eee:jfinec:v:172:y:2025:i:c:s0304405x25001618
    DOI: 10.1016/j.jfineco.2025.104153
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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