Article
The relationship between the option-implied volatility smile, stock returns and heterogeneous beliefs
Business Faculty Publications
Document Type
Article
Publication Date
10-1-2015
Abstract
We study the relationship between stock returns and the implied volatility smile slope of call and put options. Stocks with a steeper put slope earn lower future returns, while stocks with a steeper call slope earn higher future returns. Using dispersion of opinion as a proxy for belief differences, we find that the slope-stock return relation is strongest for stocks with high belief differences. The idiosyncratic component of the put slope fully explains the negative risk-adjusted stock returns. For the call slope, the idiosyncratic component dominates the systematic one, and explains the positive risk-adjusted returns.
Citation Information
Shu Feng, Yi Zhang and Geoffrey C. Friesen. "The relationship between the option-implied volatility smile, stock returns and heterogeneous beliefs" (2015) Available at: http://works.bepress.com/YiZhang/9/