Replication package for "Why Does Options Market Information Predict Stock Returns?" by Muravyev, Pearson, and Pollet
Description
This replication package includes the necessary code and data to generate the Tables and Figures in the "Why Does Options Market Information Predict Stock Returns?" paper by Dmitriy Muravyev, Neil D. Pearson, and Joshua M. Pollet, forthcoming in the Journal of Financial Economics. Please read README.txt for details. Abstract: Several influential studies show that transformations of implied volatilities calculated from options prices predict stock returns. This predictability is puzzling because market participants readily observe options prices. We find that this predictability is consistent with implied volatilities reflecting stock borrow fees that are known to predict stock returns. We derive a formula relating the option-implied volatility spread to the borrow fee. Motivated by this relation, we show that the return predictability from implied volatility spread and skew decreases by at least two-thirds if high-fee stocks are excluded. The patterns for other predictors computed from option implied volatilities are similar.