Implied and Realized Volatility in the Cross-Section of Equity Options

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  • Manuel Ammann, University of St. Gallen, Switzerland
  • David Skovmand, Denmark
  • Michael Verhofen, Allianz Dresdner, Germany
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.
Original languageEnglish
JournalInternational Journal of Theoretical and Applied Finance
Volume12
Issue6
Pages (from-to)745-765
ISSN0219-0249
DOIs
Publication statusPublished - 2009

    Research areas

  • Implied volatility, Realized volatility

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