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Equity Volatility Term Structures and the Cross Section of Option Returns

Published online by Cambridge University Press:  16 November 2017

Aurelio Vasquez
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Abstract

The slope of the implied volatility term structure is positively related to future option returns. I rank firms based on the slope of the volatility term structure and analyze the returns for straddle portfolios. Straddle portfolios with high slopes of the volatility term structure outperform straddle portfolios with low slopes by an economically and statistically significant amount. The results are robust to different empirical setups and are not explained by traditional factors, higher-order option factors, or jump risk.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 6 , December 2017 , pp. 2727 - 2754
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

This work is part of my dissertation at McGill University. The paper won the Outstanding Derivatives Paper Award at the 2012 Eastern Finance Association Meeting (Boston). I am grateful for helpful comments from an anonymous referee, Diego Amaya, Hendrik Bessembinder (the editor), Hitesh Doshi, Redouane Elkamhi, Renata Herrerias, Alex Horenstein, Jens Jackwerth (a referee), Richard Roll, Lars Stentoft, and especially from my PhD supervisors Peter Christoffersen and Kris Jacobs. I also thank seminar participants at the 2014 OptionMetrics Conference, the 2011 Financial Management Association Meeting, Escuela de Administración, Finanzas e Instituto Tecnológico (EAFIT; Medellin), the 2012 Eastern Financial Association Meeting, the 2015 European Financial Management Association Meeting, Instituto Tecnológico Autónomo de México, the 2013 meeting of the Instituto Mexicano de Ejecutivos de Finanzas, Laval University, McGill University, the 2012 Midwest Financial Association Meeting, the 2011 Northern Financial Association Meeting Tecnológico of Monterrey, Texas A&M University, and Université de Québec a Montreal for helpful comments. I thank Institut de Finance Mathématique de Montréal and Asociación Mexicana de Cultura, A.C. for financial support.

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