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The Relationship Between The Option-Implied Volatility Smile, Stock Returns And Heterogeneous Beliefs, Shu Feng, Yi Zhang, Geoffrey C. Friesen
The Relationship Between The Option-Implied Volatility Smile, Stock Returns And Heterogeneous Beliefs, Shu Feng, Yi Zhang, Geoffrey C. Friesen
Department of Finance: Faculty Publications
We study the relationship between stock returns and the implied volatility smile slope of call and put options. Stocks with a steeper put slope earn lower future returns, while stocks with a steeper call slope earn higher future returns. Using dispersion of opinion as a proxy for belief differences, we find that the slope-stock return relation is strongest for stocks with high belief differences. The idiosyncratic component of the put slope fully explains the negative risk-adjusted stock returns. For the call slope, the idiosyncratic component dominates the systematic one, and explains the positive risk-adjusted returns.
Heterogeneous Beliefs And Risk Neutral Skewness, Geoffrey C. Friesen, Yi Zhang, Thomas Zorn
Heterogeneous Beliefs And Risk Neutral Skewness, Geoffrey C. Friesen, Yi Zhang, Thomas Zorn
Department of Finance: Faculty Publications
This study tests whether investor belief differences affect the cross-sectional variation of risk-neutral skewness, using data on firm-level stock options traded on the CBOE from 2003 to 2006. Using well known proxies for heterogeneous beliefs, we find that stocks with greater belief differences have more negative skews, even after controlling for systematic risk and other firm-level variables known to affect skewness. This result also goes beyond the net price pressure hypothesis suggested by Bollen and Whaley (2004). Factor analysis identifies latent variables linked to systematic risk and belief differences. The belief factor explains more variation in the risk-neutral density than …