Skewness of the Volatility Smile and Stock Returns in Brazil

  •  Cristina Luz    
  •  Antonio Figueiredo Pinto    
  •  Marcelo Klotzle    


Several studies suggest implied volatility and options trading volume as a proxy for risk analyses and forecast returns. The skewness of the volatility smirk also appears in this field. Xing, Zhang and Zhao (2010) demonstrated the effect of this skew on the stock returns in the U.S. market and attempt to explain the results by the activity of inside traders. Using the conclusions of this study as a starting point, we sought to assess its individual validity on a daily level for the two principle shares traded on BM&FBovespa, using the implied volatility skew as an external regressor in the AR-GARCH models for shares returns. The results showed predictable gains of the models with skew, but the effect, however, was varied according to company, in accordance with the time lag of the regressor. It is possible to say that the options market in Brazil contains information about future returns; however, this connection appears, initially, to be specific to each company.

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