Do implied volatilities predict stock returns

Using a complete sample of US equity options, we find a positive, highly significant relationship between stock returns and lagged implied volatilities. The results are robust after controlling for a number of factors such as firm size, market valuation, analyst recommendations and different levels of implied volatility. Lagged historical volatility is - in contrast to the corresponding implied volatility - not relevant for stock returns. We find considerable time variation in the relationship between lagged implied volatility and stock returns. © 2009 Palgrave Macmillan.