Ex Ante Stock Market Return Volatility Implied by the OEX Option Premium

Carlene E Weber

The Financial Review, 1996, vol. 31, issue 3, 585-602

Abstract: Previous empirical evidence suggests that stock return volatility expectations change over time but the existing models of time-varying variance lack a theoretical structure that is rigorously linked to the efficient markets dividend discount model. this paper develops and tests such a model. The conditional forecast variance of the return on the stock market portfolio is expressed as a linear combination of the adjusted conditional forecast variance of the interest rate and the dividend growth rate. An empirical test using the implied variance of the S&P 100 index option provides evidence that supports the model's predictions. Copyright 1996 by MIT Press.

Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:bla:finrev:v:31:y:1996:i:3:p:585-602

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