Predicting the equity premium with the implied volatility spread

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7 Scopus citations


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.

Original languageEnglish (US)
Article number100531
JournalJournal of Financial Markets
StatePublished - Nov 2020

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


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