Implied Idiosyncratic Volatility and Stock Return Predictability

DOI: 10.4236/jmf.2014.45032   PDF   HTML   XML   4,107 Downloads   5,210 Views   Citations


This paper investigates the role of volatility risk on stock return predictability. Using 596 stock options traded at the American Stock Exchange and the Chicago Board Options Exchange (CBOE) for the period from January 2001 to December 2010, it examines the relation between different idiosyncratic volatility measures and expected stock returns for a period that involves both the dotcom bubble and the recent financial crisis. First it is showed that implied idiosyncratic volatility is the best stock return predictor among the different volatility measures used. Second, cross-section firm-specific characteristics are important on stock returns forecast. Third, we provide evidence that higher short selling constraints impact negatively stock returns having liquidity the opposite effect.

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Mateus, C. and Konsilp, W. (2014) Implied Idiosyncratic Volatility and Stock Return Predictability. Journal of Mathematical Finance, 4, 338-352. doi: 10.4236/jmf.2014.45032.

Conflicts of Interest

The authors declare no conflicts of interest.


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