We develop a zero beta industry model of growth options to explain the conflicting empirical findings on the relation between stock returns and idiosyncratic return volatility at the firm level. By allowing for the volatility of the underlying idiosyncratic choice variables to exhibit...

This paper surveys the theoretical literature investigating the effect of firms' investment flexibility on the cross-section of expected stock returns. Real options analysis derives firms' value-maximizing investment policies as functions of exogenous fundamental drivers of profitability and...

We develop a theoretical trading conditioning model subject to price volatility and return information in terms of market psychological behavior, based on analytical transaction volume-price probability wave distributions in which we use transaction volume probability to describe price...

We study the real-time characteristics and drivers of jumps in option prices. To this end, we employ high frequency data from the 24-hour E-mini S&P 500 options market. We find that option prices do not jump simultaneously across strikes and maturities and are uncorrelated with jumps in the...

This paper examines continuous-time models for the S&P 100 index and its constituents. We find that the jump process of the typical stock looks significantly different than that of the index. Most importantly, the average size of a jumps in the returns of the typical stock is positive, while it...

Are options on more volatile assets expected to provide higher or lower return? Using analytics, we show the ambiguous nature of the answer when the volatility differential is due to the systematic/priced risk. Here the difference in the expected return of the assets also matters and has an...

We analyze the relation between expected option returns and the volatility of the underlying securities. The expected return from holding a call (put) option is a decreasing (increasing) function of the volatility of the underlying. These predictions are strongly supported by the data. In the...

An anchoring-adjusted option pricing model is developed in which the volatility of the underlying stock return is used as a starting point that gets adjusted upwards to form expectations about call option volatility. I show that the anchoring price lies within the bounds implied by risk-averse...

We develop an ex-ante measure of expected stock returns based on analyst price targets. We then show that ex-ante measures of volatility, skewness, and kurtosis implied from stock option prices are positively related to the cross section of ex-ante expected stock returns. While expected returns...

A growing literature analyzes the cross-section of single stock option returns, virtually always under the (implicit or explicit) assumption of a monotonically decreasing pricing kernel. Using option returns, we non-parametrically provide significant and robust evidence that the pricing kernel...