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Macroeconomic factors and index option returns

Ya-Wen Lai

International Review of Economics & Finance, 2017, vol. 48, issue C, 452-477

Abstract: This study empirically investigates whether macroeconomic factors are priced in the cross-section of index option returns. Macroeconomic factors are extracted from a large panel of 132 economic activity indicators using dynamic factor analysis. The empirical analysis employs linear factor methodology with a factor structure including market return and macroeconomic factors. The results show that the risk premia on inflation, term spread, industrial production, and housing factors are significant. Further, business sales is a useful conditioning factor that drives variation in market betas. These extracted macroeconomic factors provide information that is not fully captured by Fama and French's (2015) investment and profitability factors.

Keywords: Macroeconomic factors; Option returns; Dynamic factor analysis (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.iref.2016.11.002

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