Implied equity premium and market beta

Zhan Wang, K. Victor Chow and Jiahao Gu

Finance Research Letters, 2025, vol. 78, issue C

Abstract: We extend the ex-ante mean-variance (SVIX) asset pricing models of Martin (2017) and Martin-Wagner (2019) to a mean-VIX framework by incorporating higher-moment and co-moment risk in asset pricing, which builds a theoretical connection between equity returns and the commonly used implied volatility—VIX. Our proposed mean-VIX model is risk-neutral with left-tail asymmetries in returns to correct the SVIX approach's downside bias. We derive an option implied market beta of a stock as the weighted average of the betas of SVIX and VIX. Empirically, we develop an investible market portfolio (MKT*) that mimics realized outcomes on the implied market index adjusted for SVIX and VIX. Based on the MKT*, the mean-VIX asset pricing framework shows superior abilities in return prediction and portfolio allocation.

Keywords: Volatility-asymmetry; Implied equity premium; Implied Beta; VIX; SVIX (search for similar items in EconPapers)
JEL-codes: D81 G02 G11 G12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:78:y:2025:i:c:s1544612325003587

DOI: 10.1016/j.frl.2025.107095

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