Do implied volatilities predict stock returns?


Using a complete sample of US equity options, we find a positive, highly significant relationship between stock returns and lagged implied volatilities. The results are robust after controlling for a number of factors such as firm size, market valuation, analyst recommendations and different levels of implied volatility. Lagged historical volatility is – in contrast to the corresponding implied volatility – not relevant for stock returns. We find considerable time variation in the relationship between lagged implied volatility and stock returns.

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We thank the editor, an anonymous reviewer, Sebastien Betermier, Peter Feldhütter, Thomas Gilbert, Sara Holland, Peter Tind Larsen, Miguel Palacios, Hari Phatak and David Skovmand for helpful comments.

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Correspondence to Michael Verhofen.

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Ammann, M., Verhofen, M. & Süss, S. Do implied volatilities predict stock returns?. J Asset Manag 10, 222–234 (2009).

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  • implied volatility
  • expected returns
  • market efficiency