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We thank Yakov Amihud, Fred Benth, Peter Carr, Magnus Dahlquist, Ralf Elsas, Joachim Grammig, Fabian Hollstein, Kjell Nyborg, Jens Jackwerth, Joël Peress, Marcel Prokopczuk, Stefan Ruenzi, Nic Schaub, Christian Schlag, David Schimko, Paul Söderlind, Erik Theissen, Grigory Vilkov, as well as the participants of the NYU Tandron Finance seminar, the annual conference of the Swiss Society for Financial Market Research 2017, of the 23rd annual meeting of the German Finance Association 2016, of the doctoral workshop at the 23rd annual meeting of the German Finance Association 2016, the Brown Bag Seminar of the University of St.Gallen, the 2016 joint seminar session of the University of St.Gallen and the University of Konstanz, and the 2015 Topics in Finance Seminar in Davos for helpful discussions and comments. All errors are our own.
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Based on a novel rescaled option-implied Value-at-Risk (rVaR) measure, we show that option-implied information is priced differently depending on whether it is based on options with strikes close to the current price of the underlying or far-out-of-the-money options. If the rVaR is estimated from options close-to-the-money, i.e., the 50% rVaR, stocks with high risk outperform stocks with low risk by 0.60% per month, in line with downside risk-averse investors. In contrast, if rVaR is estimated from far-out-of-the-money options, i.e., the 90% rVaR, stocks with high risk underperform stocks with low risk by 0.42% per month, implying that stocks with low risk have higher returns in the cross-section of returns. Our results are consistent with investors who prefer reliable information over unreliable information and explain contradictory results of prior studies.
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