School of Business Administration Seminar Series A smiling Bear in the Equity Options Market and the Cross-section of Stock Returns Baeho Kim Associate Professor of Finance Korea University Abstract: We propose a measure for the convexity of an option-implied volatility curve, IV convexity, as a forward-looking measure of excess tail-risk contribution to the perceived variance of underlying equity returns. Using equity options data for individual U.S.-listed stocks during 2000-2013, we find that the average return differential between the lowest and highest IV convexity quintile portfolios exceeds 1% per month, which is both economically and statistically significant on a risk-adjusted basis. Our empirical findings indicate that informed options traders anticipating heavier tail risk proactively induce leptokurtic implied distributions of underlying stock returns before equity investors express their tail-risk aversion. Date & Time: Friday, March 4th, 2016 at 14:00 Location: at BAB 601-3