Validity, tightness, and forecasting power of risk premium bounds

Kerry Back, Kevin Crotty and Seyed Mohammad Kazempour

Journal of Financial Economics, 2022, vol. 144, issue 3, 732-760

Abstract: Recent work uses option prices to derive lower bounds for the risk premia of the market portfolio and individual stocks. We test the bounds conditionally. We cannot reject that they are valid, but we do reject that they are tight. Using the market bounds as forecasts appears unreasonable in many cases due to their high slackness. Adding past mean slackness is a potential improvement but is hampered by the brevity of the available data series. The correlation of the stock bounds with subsequent returns stems primarily from the time series rather than the cross section.

Keywords: Risk premia; Bounds; Conditional tests; Predictability; Forecasting (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:144:y:2022:i:3:p:732-760

DOI: 10.1016/j.jfineco.2022.02.003

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