Impact of Implied Moments of Returns' Distribution on the Dynamics of Returns

In our research we investigate whether public information from options markets can be used as a predictor for cross-sectional future stock returns in a medium-term time period after macroeconomic data announcements. We study the relationship between stock returns and the implied volatility smile slope of call and put options. Stocks with a steeper put slope earn lower future returns,while stocks with a steeper call slope earn higher future returns. We also document that changes in implied skewness and implied volatility slope before announcement have strong predictive power, showing that stocks with more negative skews (IV slope) caused by macroeconomic uncertainty underperform stocks with less negative skew (IV slope) figures. We showed that information content of option-implied information is statistically more significant before announcement of important macroeconomic data.