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  • The calm after the storm: Implied volatility and future stock index returns

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    Author(s)
    Lubnau, Thorben Manfred
    Todorova, Neda
    Griffith University Author(s)
    Todorova, Neda
    Year published
    2015
    Metadata
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    Abstract
    This article explores the predictive power of five implied volatility indices for subsequent returns on the corresponding underlying stock indices from January 2000 through October 2013. Contrary to previous research, very low volatility levels appear to be followed by significantly positive average returns over the next 20, 40 or 60 trading days. Rolling trading simulations show that positive adjusted excess returns can be achieved when long positions in the stock indices are taken on days of very low implied volatility. This may be a hint that market inefficiencies exist in some markets, especially outside the USA. The ...
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    This article explores the predictive power of five implied volatility indices for subsequent returns on the corresponding underlying stock indices from January 2000 through October 2013. Contrary to previous research, very low volatility levels appear to be followed by significantly positive average returns over the next 20, 40 or 60 trading days. Rolling trading simulations show that positive adjusted excess returns can be achieved when long positions in the stock indices are taken on days of very low implied volatility. This may be a hint that market inefficiencies exist in some markets, especially outside the USA. The excess returns measured against a buy and hold benchmark are significant for the German and Japanese market when tested with a bootstrap methodology. The results are robust against a broad spectrum of specifications.
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    Journal Title
    The European Journal of Finance
    DOI
    https://doi.org/10.1080/1351847X.2014.935872
    Copyright Statement
    © 2014 Taylor & Francis (Routledge). This is an Accepted Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 21 Jul 2014, available online: http://www.tandfonline.com/doi/full/10.1080/1351847X.2014.935872
    Subject
    Finance
    Banking, Finance and Investment
    Publication URI
    http://hdl.handle.net/10072/63866
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    • Journal articles

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