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The Distribution of Stock Returns Implied in Their Options at the Turn-of-the-Year: A Test of Seasonal Volatility

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  • Jones, Steven L
  • Singh, Manoj K

Abstract

The authors find that, for a sample of call options on stocks with low prior returns, the implied volatilities increase as the year-end approaches. However, there is no increase in the volatilities implied from put options on the same stocks over the same dates. This is inconsistent with a hypothesis that attributes the seasonal in stock returns to an increase in systematic risk. The results are consistent with price pressure from portfolio rebalancing at the turn-of-the-year. The implications are that the option market anticipates the return seasonal, but it survives in the stock market due to transaction costs. Copyright 1997 by University of Chicago Press.

Suggested Citation

  • Jones, Steven L & Singh, Manoj K, 1997. "The Distribution of Stock Returns Implied in Their Options at the Turn-of-the-Year: A Test of Seasonal Volatility," The Journal of Business, University of Chicago Press, vol. 70(2), pages 281-311, April.
    • Handle: RePEc:ucp:jnlbus:v:70:y:1997:i:2:p:281-311
    DOI: 10.1086/209718
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    Cited by:

    1. Christopher J. Neely & Drew B. Winters, 2005. "Year-end seasonality in one-month LIBOR derivatives," Working Papers 2003-040, Federal Reserve Bank of St. Louis.
    2. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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