C. Moll, S. Huffman: The Incremental Information Content of Innovations in Implied Idiosyncratic Volatility

April 23, 2016

Motivated by mixed evidence related to the pricing of measures of risk, we investigate the information content of innovations in implied idiosyncratic volatility. Using both cross-sectional and time-series methodologies, we find that innovations in implied idiosyncratic volatility explain future returns for a sample of 2,864 optionable firms examined during the 1999-2010 sample period. We find that long-short portfolios formed using innovations in implied idiosyncratic volatility produce much larger abnormal returns than long-short portfolios formed using the level of implied idiosyncratic volatility.