Real Options, Volatility, and Stock Returns

Gustavo Grullon, Evgeny Lyandres, Alexei Zhdanov

Research output: Contribution to journalArticlepeer-review

106 Scopus citations


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
Issue number4
StatePublished - Aug 1 2012

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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