Research

The option implied volatility of an asset can be explained by the market implied volatility. This simple model explains much of individual stocks’ expected volatility behavior. Through Monte Carlo simulation I show that standardized residuals from this model can be used to detect shocks to implied volatility.

Standardized abnormal volatility captures an individual stock’s implied volatility which is not explained by its estimated relationship with the level of the VIX Index. I have shown by simulation that this measure can detect shocks to volatility. While shocks may be temporary or indicate lasting shifts in a stock’s risk structure, they may predict future stock portfolio returns.