Abstract
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.
Original language | English (US) |
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Pages (from-to) | 62-73 |
Number of pages | 12 |
Journal | International Review of Financial Analysis |
Volume | 41 |
DOIs | |
State | Published - Oct 1 2015 |
Keywords
- Heterogeneous beliefs
- Implied volatility
- Smile slope
ASJC Scopus subject areas
- Finance
- Economics and Econometrics