What is the Expected Return on the Market?

Ian Martin

The Quarterly Journal of Economics, 2017, vol. 132, issue 1, 367-433

Abstract: I derive a lower bound on the equity premium in terms of a volatility index, SVIX, that can be calculated from index option prices. The bound implies that the equity premium is extremely volatile and that it rose above 20% at the height of the crisis in 2008. The time-series average of the lower bound is about 5%, suggesting that the bound may be approximately tight. I run predictive regressions and find that this hypothesis is not rejected by the data, so I use the SVIX index as a proxy for the equity premium and argue that the high equity premia available at times of stress largely reflect high expected returns over the very short run. I also provide a measure of the probability of a market crash, and introduce simple variance swaps, tradable contracts based on SVIX that are robust alternatives to variance swaps.

JEL-codes: E44 G1 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (170)

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Related works:
Working Paper: What is the expected return on the market? (2017)
Working Paper: What is the expected return on the market? (2016)
Working Paper: What is the Expected Return on the Market? (2015)
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