Using equity, index and commodity options to obtain forward-looking measures of equity and commodity betas and idiosyncratic variance

Ehud Ronn

Journal of Energy Markets

Abstract: We present a parsimonious and theoretically sound basis for extracting forward-looking measures of equity and commodity betas and idiosyncratic variance. Defining forward-looking betas and idiosyncratic variance as perturbations of historical estimates, we use equity and index options under a single-factor model to discern perceptions of oil companies’ prospective beta. The prospective fraction of idiosyncratic variance relative to total variance indicates the onset of crises, when idiosyncratic fades relative to systematic, complementing the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) and CBOE implied correlation. The model is extended to options on equities and oil futures. This forward-looking oil beta, in conjunction with risk-neutral futures prices, yields an oil-price forecast based on the capital asset pricing model.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-energy-markets/789 ... iosyncratic-variance (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ2:7890651

Access Statistics for this article

More articles in Journal of Energy Markets from Journal of Energy Markets
Bibliographic data for series maintained by Thomas Paine ().