The Cross Section of Equity Implied Variance
نویسنده
چکیده
The implied variances of 167 firms are examined over the period 1991 through 1995. The traditional market model of returns is shown to be a good first order model for explaining the cross section of variances though firm specific variances appear to exhibit stronger covariance than the market model predicts. The existence of a positive bias over realized and forecast variances is documented. The bias is also shown to be significantly and positively related to the option bias for the S&P 100 option bias. The size of this relationship is shown to be related to the market model betas derived in the first section of this paper. These results are consistent with the existence of a negative market price of volatility risk.
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