Option-implied equity risk and the cross section of stock returns
Journal
Financial Analysts Journal
Journal Volume
72
Journal Issue
6
Pages
42-55
Date Issued
2016
Author(s)
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. ? 2016 CFA Institute. All rights reserved.
Type
journal article