Jump Risk, Stock Returns, and Slope of Implied Volatility Smile
Under the jump-diffusion framework, expected stock return is dependent on the average jump size of stock price, which can be inferred from the slope of option implied volatility smile. This implies a positive relation between expected stock return and slope of implied volatility smile, which is strongly supported by the empirical evidence. For over 4,000 stocks ranked by slope of implied volatility smile during 1996 – 2005, the difference between portfolio returns of stocks in the highest and lowest quintiles is 22.2％ per year. The findings cannot be explained by other variables like beta, volatility, skewness, size, and book-to-market, or by risk factors like RM - Rf, SMB, HML, and MOM. We suggest a slope factor to proxy the jump risk and find it to explain cross-sectional stock returns.
Shu Yan
Moore School of Business University of South Carolina
国际会议
大连
英文
1-48
2008-07-02（万方平台首次上网日期，不代表论文的发表时间）