Option-implied equity risk and the cross section of stock returns

Te Feng Chen, San Lin Chung, Wei Che Tsai*

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

6 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)42-55
Number of pages14
JournalFinancial Analysts Journal
Volume72
Issue number6
DOIs
StatePublished - 01 11 2016
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2016 CFA Institute. All rights reserved.

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