The conditional expected market return

Fousseni Chabi-Yo and Johnathan Loudis

Journal of Financial Economics, 2020, vol. 137, issue 3, 752-786

Abstract: We derive lower and upper bounds on the conditional expected excess market return that are related to risk-neutral volatility, skewness, and kurtosis indexes. The bounds can be calculated in real time using a cross section of option prices. The bounds require a no-arbitrage assumption, but they do not depend on distributional assumptions about market returns or past observations. The bounds are highly volatile, positively skewed, and fat-tailed. They imply that the term structure of expected excess holding period returns is decreasing during turbulent times and increasing during normal times and that the expected excess market return is on average 5.2%.

Keywords: Equity risk premium; Risk-neutral moments; Preferences (search for similar items in EconPapers)
JEL-codes: E44 G1 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:137:y:2020:i:3:p:752-786

DOI: 10.1016/j.jfineco.2020.03.009

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