Real Options, Volatility, and Stock Returns

Gustavo Grullon, Evgeny Lyandres, Alexey Zhdanov

Research output: Contribution to journalArticle

71 Citations (Scopus)

Abstract

We provide evidence that the positive relation between firm-level stock returns and firm-level return volatility is due to firms' real options. Consistent with real option theory, we find that the positive volatility-return relation is much stronger for firms with more real options and that the sensitivity of firm value to changes in volatility declines significantly after firms exercise their real options. We reconcile the evidence at the aggregate and firm levels by showing that the negative relation at the aggregate level may be due to aggregate market conditions that simultaneously affect both market returns and return volatility.

Original languageEnglish (US)
Pages (from-to)1499-1537
Number of pages39
JournalJournal of Finance
Volume67
Issue number4
DOIs
StatePublished - Aug 1 2012

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Stock returns
Real options
Return volatility
Firm value
Market returns
Market conditions
Real options theory
Exercise

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Grullon, Gustavo ; Lyandres, Evgeny ; Zhdanov, Alexey. / Real Options, Volatility, and Stock Returns. In: Journal of Finance. 2012 ; Vol. 67, No. 4. pp. 1499-1537.
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Real Options, Volatility, and Stock Returns. / Grullon, Gustavo; Lyandres, Evgeny; Zhdanov, Alexey.

In: Journal of Finance, Vol. 67, No. 4, 01.08.2012, p. 1499-1537.

Research output: Contribution to journalArticle

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