Option-implied volatilities and stock returns : evidence from industry-neutral portfolios
Document Type
Journal article
Source Publication
Journal of Portfolio Management
Publication Date
Fall 1-1-2014
Volume
41
Issue
1
First Page
65
Last Page
77
Abstract
Recent studies demonstrate the profitability of stock portfolios constructed according to implied volatility measures inferred from option prices. This article examines industry effects on such portfolios' performance. Results show that quintile portfolios constructed using volatility skew and volatility spread are subject to substantial industry effects, which are particularly strong during market turbulence. The authors form industry-neutral portfolios and compare their performances to those of frill-universe portfolios that do not consider industry exposure. Results show significant improvement when portfolio strategies are implemented in an industry-neutral manner, based on either volatility skew or volatility spread.
DOI
10.3905/jpm.2014.41.1.065
Print ISSN
00954918
E-ISSN
21688656
Publisher Statement
Copyright © 2014 Institutional Investor LLC
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Lui, X., Pong, E. S. Y., Shackleton, M. B., & Zhang, Y. (2014). Option-implied volatilities and stock returns: Evidence from industry-neutral portfolios. Journal of Portfolio Management, 41(1), 65-77. doi: 10.3905/jpm.2014.41.1.065