Implied Volatility Spread and Future Returns
Date Issued
2009
Date
2009
Author(s)
Lee, Yuan-Hao
Abstract
Lots of previous studies discussed about the relationships between volatility indices and future returns on stock markets. However, few researches directly utilized implied volatilities of index options to forecast future returns. Therefore, this study focuses on the relationship between implied volatilities of index options and the future returns. First, we investigate the relationship between the future returns on S&P 500 and current levels and innovations of squared VIX. Second, we estimate the relationship between the future returns and the implied volatility spread of at-the-money S&P 500 index call and put options. Third, we add the two VIX-related factors described above to the regression. Finally, we control for the three Fama and French and momentum factors. We find the implied volatility spread has a strong predictive ability to forecast future returns in two weeks.
Subjects
VIX
index options
implied volatility
prediction
Type
thesis
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