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Option Implied Volatility's Predictability On Monthly Stock Returns, Hung T. Dao
Option Implied Volatility's Predictability On Monthly Stock Returns, Hung T. Dao
Senior Independent Study Theses
Since the trading of options is based on underlying stocks, it is reasonable to assume that information from the options market can be used to explain the returns in the stock market. Our independent study investigates the relationship between options implied volatility and stock returns. Previous studies have found significant results in using implied volatility in predicting stock returns. This paper provides a discussion of such studies, the theoretical framework for the research topic, and the Black-Scholes model, which is famous for its application in implied volatility calculation. Monthly returns of 20 large US firms are regressed against implied volatility …
Beyond Ss: An Analysis Of Alternative Risk Measures, Jai Kedia
Beyond Ss: An Analysis Of Alternative Risk Measures, Jai Kedia
Senior Independent Study Theses
Investors require a return from investing in stock securities that adequately compensate the investors for the risk level assumed. Therefore, any calculation of expected returns from a stock requires knowledge of the risk of the security. While there is no strong consensus on an ideal risk measure, traditionally risk has been conceptualized as volatility and is measured by the ß of the stock or portfolio. This paper hypothesizes that alternative risk measures such as higher order moments, size, leverage, and price-to-book value add explanatory power to the ß when predicting stock returns. Empirical analysis is conducted using both regression and …