Equity premium prediction: The role of information from the options market

Antonios K. Alexandridis, Iraklis Apergis, Ekaterini Panopoulou and Nikolaos Voukelatos

Journal of Financial Markets, 2023, vol. 64, issue C

Abstract: We examine the role of information from the options market in forecasting the equity premium. We provide evidence that the equity premium is predictable out-of-sample using a set of CBOE strategy benchmark indices as predictors. We use a range of econometric approaches to generate point, quantile, and density forecasts of the equity premium. We find that models based on option variables consistently outperform the historical average benchmark. In addition to statistical gains, using option predictors results in substantial economic benefits for a mean–variance investor, delivering up to a fivefold increase in certainty equivalent returns over the benchmark during the 1996–2021 sample period.

Keywords: Equity premium; Forecasting; Options; Quantile regression (search for similar items in EconPapers)
JEL-codes: C53 C58 G14 G17 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:64:y:2023:i:c:s1386418122000908

DOI: 10.1016/j.finmar.2022.100801

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