Option-Implied Equity Risk and the Cross-Section of Stock Returns
Author | : Te-Feng Chen |
Publisher | : |
Total Pages | : |
Release | : 2016 |
ISBN-10 | : OCLC:1306199429 |
ISBN-13 | : |
Rating | : 4/5 (29 Downloads) |
Download or read book Option-Implied Equity Risk and the Cross-Section of Stock Returns written by Te-Feng Chen and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Using forward-looking information in the options market, we introduce a new method for better identifying systematic market risk as a predictor for the cross-section of stock returns. Empirical results show that there is a significantly positive relation between our option-implied beta and subsequent stock returns, in which a long-short portfolio formed on the option-implied beta generates an average monthly risk-adjusted return of 0.96%. In support of its economic significance, we further find that our option-implied beta significantly predicts the future realized betas and that the associated risk premium is a strong predictor of future market returns.