Early exercise, implied volatility spread and future stock return: Jumps bind them all

Garrett, Ian ORCID: 0000-0002-5634-1088 and Gazi, Adnan ORCID: 0000-0001-9170-2777 (2024) Early exercise, implied volatility spread and future stock return: Jumps bind them all. Journal of Futures Markets, 44 (5). pp. 720-743.

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Official URL: http://dx.doi.org/10.1002/fut.22491

Abstract

<jats:title>Abstract</jats:title><jats:p>We find that early exercise premiums of exchange‐traded single‐stock American puts, in excess of the GBM‐world premium, can negatively predict future stock returns. Simulations suggest that asset‐value jumps, especially the mean jump‐size, can positively drive this excess premium, while jump‐size can also negatively induce the implied volatility (IV) spread of equivalent American option‐pairs. Empirically, controlling for the effect of jump‐size in excess premiums, the premium loses its predictive power. Furthermore, controlling for the excess premium or jump‐size, IV spreads' predictability shown in the literature also diminishes. Our evidence survives under alternative explanations like informed trading, stock mispricing or market frictions.</jats:p>

Item Type:	Article
Divisions:	Faculty of Humanities and Social Sciences > School of Management
Depositing User:	Symplectic Admin
Date Deposited:	01 Feb 2024 08:13
Last Modified:	08 May 2024 11:22
DOI:	10.1002/fut.22491
Related URLs:	Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3178226