TITLE:
Implied Idiosyncratic Volatility and Stock Return Predictability
AUTHORS:
Cesario Mateus, Worawuth Konsilp
KEYWORDS:
Options, Risk Premium, Stock, Volatility
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.4 No.5,
November
26,
2014
ABSTRACT: 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.