Financial Rounds: Biases in Implied Volatilities

I will TRY to get to this later, but it is so important (yeah I am biased--I like implied volatilities) that I did not want to take any chances of getting busy and not getting to it AND besides it is a good opportunity to suggest new readers take a look at Financial Rounds. It is one of my favorites and written by another FinanceProfessor (who goes by the Unknown professor).

Financial Rounds: Biases in Implied Volatilities

"In their paper "Implied and Realized Volatility in the Cross-Section of Equity Options" Manuel Ammann, David Skovmand and Michael Verhofen examine whether implied volatilites differ systematically from realized vlatilities, and whether those differences are related to firm risk (beta) size (market cap),growth opportunities (market/book), and momentum. Here's the abstract:

Using a complete sample of US equity options, we analyze patterns of implied volatility in the cross-section of equity options with respect to stock characteristics. We find that high-beta stocks, small stocks, stocks with a low-market-to-book ratio, and non-momentum stocks trade at higher implied volatilities after controlling for historical volatility. We find evidence that implied volatility overestimates realized volatility for low-beta stocks, small caps, low-market-to-book stocks, and stocks with no momentum and vice versa. However, we cannot reject the null hypothesis that implied volatility is an unbiased predictor of realized volatility in the cross section."