Option-Implied Equity Risk and the Cross Section of Stock Returns

In our study, we take advantage of the forward-looking nature of information in option prices to estimate systematic equity risk while controlling for the effect of idiosyncratic skewness. Empirical results show a significantly positive relationship between the option-implied beta estimate and subse...

Full description

Saved in:
Bibliographic Details
Published in:Financial analysts journal 2016-11, Vol.72 (6), p.42-55
Main Authors: Chen, Te-Feng, Chung, San-Lin, Tsai, Wei-Che
Format: Article
Language:English
Subjects:
Beta
Bids
Capital assets
Economic models
Equity
Estimates
Generalized method of moments
Interest rates
Macroeconomics
Options markets
Prices
Rates of return
Risk premiums
Securities prices
Skewness
Stock exchanges
Stock prices
Studies
Volatility
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:In our study, we take advantage of the forward-looking nature of information in option prices to estimate systematic equity risk while controlling for the effect of idiosyncratic skewness. Empirical results show a significantly positive relationship between the option-implied beta estimate and subsequent stock returns. A long–short portfolio based on our beta estimate earned an average monthly return of 0.96%. We also find that the option-implied beta predicts future realized betas and that the risk premium on the option-implied beta is positively associated with future market returns and contains information about future macroeconomic variables.
ISSN:0015-198X
1938-3312
DOI:10.2469/faj.v72.n6.2