Review of Financial Studies 2026

The Variance Premium and Seasonal Momentum in Option Returns

Steven L. Heston¹; Christopher S. Jones²; MEHDI KHORRAM³; SHUAIQI LI⁴; Haitao Mo⁵

¹ University of Maryland Smith School of Business, , the · ² University of Southern California Marshall School of Business, , the · ³ Iowa State University Ivy College of Business, , the · ⁴ City University of Hong Kong Department of Economics and Finance, , · ⁵ University of Kansas School of Business, , the

Abstract

We develop a model-free measure of the variance premium by constructing option portfolios whose returns are highly correlated with realized stock variance. This effectively decomposes returns into realized variance minus implied variance. We apply this decomposition to document a novel quarterly cross-sectional continuation pattern in both realized variance and implied variance of individual stocks. Implied variance underanticipates the seasonality of realized variance, so options that performed well at quarterly lags continue to earn high returns in the future. Quarterly periodicity in realized stock variance only occurs on days with analyst earning revisions, suggesting an informational channel for this pattern.

DOI

10.1093/rfs/hhag057

Language

en

Sources

crossref openalex

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