Munich Personal RePEc Archive

Predicting the equity premium with the implied volatility spread

Cao, Charles and Simin, Timothy and Xiao, Han (2019): Predicting the equity premium with the implied volatility spread. Forthcoming in: Journal of Financial Markets

This is the latest version of this item.

[img] PDF
MPRA_paper_103649.pdf

Download (682kB)

Abstract

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.

Available Versions of this Item

Logo of the University Library LMU Munich
MPRA is a RePEc service hosted by
the University Library LMU Munich in Germany.