Yigit Atilgan

Volatility Spreads and Earnings Announcement Returns

Prior research documents that volatility spreads predict stock returns. If the trading activity of informed investors is an important driver of volatility spreads, then the predictability of stock returns should be more pronounced during major information events. This paper investigates whether the predictability of equity returns by volatility spreads is stronger during earnings announcements. Volatility spreads are measured by the implied volatility differences between pairs of strike price and expiration date matched put and call options and capture price pressures in the option market. During a two-day earnings announcement window, the abnormal returns to the quintile that includes stocks with relatively expensive call options is more than 1.5% greater than the abnormal returns to the quintile that includes stocks with relatively expensive put options. This result is robust after measuring volatility spreads in alternative ways and controlling for firm characteristics and lagged equity returns. The degree of announcement return predictability is stronger when volatility spreads are measured using more liquid options, the information environment is more asymmetric, and stock liquidity is low.

Implied Volatility Spreads and Expected Market Returns

This article investigates the intertemporal relation between volatility spreads and expected returns on the aggregate stock market. We provide evidence for a significantly negative link between volatility spreads and expected returns at the daily and weekly frequencies. We argue that this link is driven by the information flow from option markets to stock markets. The documented relation is significantly stronger for the periods during which (i) SP (ii) cash flow and discount rate news are large in magnitude; and (iii) consumer sentiment index takes extreme values. The intertemporal relation remains strongly negative after controlling for conditional volatility, variance risk premium, and macroeconomic variables. Moreover, a trading strategy based on the intertemporal relation with volatility spreads has higher portfolio returns compared to a passive strategy of investing in the S&P 500 index, after transaction costs are taken into account.

Studies of Equity Returns in Emerging Markets: A Literature Review

We review the literature on empirical asset pricing in emerging markets. This literature is quite diverse and almost thirty years old. To make this task manageable, we focus on equity markets, limit the topics to return predictability and volatility modeling, and restrict the review to the set of top journals in finance and journals that specialize in emerging markets.

Downside Risk in Emerging Markets

This paper investigates the relation between downside risk and expected returns on the aggregate stock market in an international context. Nonparametric and parametric value at risk are used as measures of downside risk to determine the existence of a risk-return trade-off. For emerging markets, fixed effects panel data regressions provide evidence for a significantly positive relationship between monthly expected market returns and downside risk. This result is robust after controlling for aggregate dividend yield and price-to-fundamental ratios. The relationship between expected returns and downside risk is weaker for developed markets and vanishes when control variables are included in the specification.

Macroeconomic Factors and Equity Returns in Borsa Istanbul

This paper investigates equity return exposure to various macroeconomic factors and the performance of factor betas in predicting the cross-sectional variation in stock returns. We utilize a two-step procedure to directly test the implications of the Arbitrage Pricing Theory. First, we calculate monthly factor betas and then, we estimate the sensitivity of equity returns towards the factor betas. We find that (i) there exists a negative and significant relation between interest rate betas and future equity returns; (ii) the inclusion of market, book-to-market, size and momentum factor betas does not subsume the predictive power of the interest rate beta; and (iii) these results are driven by the debt-to-equity ratios of individual firms. We conclude that the financial leverage driven sensitivity of returns towards interest rates is a priced risk factor in the Turkish stock market.

Derivative Markets in Emerging Economies: A Survey

We review the literature on derivatives in emerging markets. This young but booming literature appears to be concentrated on a few countries, but is quite rich in terms of subject coverage. We classify these topics based on the generally recognized functions of derivative markets and restrict the review to the set of top journals in finance and those that specialize on emerging markets or derivatives.

Risk-adjusted performances of world equity indices

This article investigates whether equity indices of twenty-four emerging and twenty-eight developed markets compensate their investors equally after adjusting for total or downside risk, and examines the predictive power of reward-to-risk ratios for expected market returns. We find that when all fifty-two markets are ranked based on their alternative reward-to-risk ratios, almost all of the countries in the top (bottom) quartile are emerging (developed) markets. The pooled means of the reward-to-risk ratios are also significantly higher for emerging markets. Both portfolio and regressions analysis reveal that there is a significantly positive relation between various reward-to-risk metrics and expected market returns.

Downside Beta and Equity Returns around the World

This paper investigates the relation between downside beta and expected stock returns in a global context using more than 170 million daily return observations. Contrary to the findings in the U.S. equity market, portfolio-level analyses and firm-level cross-sectional regressions indicate that downside beta does not explain the cross-sectional differences in contemporaneous and future monthly returns in an international setting. The results are robust to using different market indices, left-tail cut-off points and estimation windows to calculate downside betas, omitting the U.S. stocks from the global sample, excluding highly volatile/illiquid stocks, utilizing alternative global pricing factors, and replicating the analysis at the country-level.

The Cross-Section of Equity Returns in Emerging Markets

This study investigates the relation between a large set of firm-specific attributes and future equity returns for a sample of stocks from 23 emerging markets. Country-specific univariate analyses based on equal-weighted portfolio returns reveal strong evidence of short-term momentum (rather than reversal) and medium-term return momentum patterns. We also find some evidence that market beta, book-to-market ratio and downside risk metrics can predict equity returns, however, these relations get weaker once value-weighting is used. In univariate regressions, smaller firms with higher idiosyncratic volatility, lottery-like characteristics and stock-specific downside risk are associated with higher future returns, however, these relations disappear in a multivariate setting. We conclude that, out of a comprehensive set of variables studied in developed markets, the most robust cross-sectional effects for emerging market equities are short- and medium-term return momentum.

Left-Tail Momentum: Limited Attention of Individual Investors and Expected Equity Returns

This paper documents a significantly negative cross-sectional relation between left-tail risk and future returns on individual stocks trading in the U.S. and international countries. We find that the left-tail risk anomaly is stronger for stocks that are more likely to be held by retail investors and that receive less investor attention, underscoring the importance of investor clientele and inattention mechanisms. We also provide an alternative explanation showing that individual investors underestimate the persistence in left-tail risk and overprice stocks with large recent losses. Thus, low returns in the left-tail of the distribution persist into the future causing left-tail return momentum.