TY - JOUR
T1 - Predicting the equity premium with the implied volatility spread
AU - Cao, Charles
AU - Simin, Timothy
AU - Xiao, Han
N1 - Publisher Copyright:
© 2019 Elsevier B.V.
PY - 2020/11
Y1 - 2020/11
N2 - We show that the call-put implied volatility spread (IVS) outperforms many well-known predictors of the U.S. equity premium at return horizons up to six months over the period from 1996:1 to 2017:12. The predictive ability of the IVS is unrelated to the dividend yield and is useful in explaining the cross-section of returns. Decomposing the IVS, we find the longer run predictive ability of the IVS operates primarily through a cash flow channel. We also find the IVS is significantly related to indicators of aggregate market direction and expected market conditions. Our results are consistent with the IVS reflecting market sentiment as well as information about informed trading.
AB - We show that the call-put implied volatility spread (IVS) outperforms many well-known predictors of the U.S. equity premium at return horizons up to six months over the period from 1996:1 to 2017:12. The predictive ability of the IVS is unrelated to the dividend yield and is useful in explaining the cross-section of returns. Decomposing the IVS, we find the longer run predictive ability of the IVS operates primarily through a cash flow channel. We also find the IVS is significantly related to indicators of aggregate market direction and expected market conditions. Our results are consistent with the IVS reflecting market sentiment as well as information about informed trading.
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U2 - 10.1016/j.finmar.2019.100531
DO - 10.1016/j.finmar.2019.100531
M3 - Article
AN - SCOPUS:85077560669
SN - 1386-4181
VL - 51
JO - Journal of Financial Markets
JF - Journal of Financial Markets
M1 - 100531
ER -