Generalized Bounds on the Conditional Expected Excess Return on Individual Stocks

Fousseni Chabi-Yo (), Chukwuma Dim () and Grigory Vilkov
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Fousseni Chabi-Yo: Isenberg School of Management, University of Massachusetts-Amherst; Amherst, Massachusetts 01003
Chukwuma Dim: Finance Department, Frankfurt School of Finance & Management, Frankfurt 60323, Germany

Management Science, 2023, vol. 69, issue 2, 922-939

Abstract: We derive generalized bounds on conditional expected excess returns that can be computed from option prices. The generalized lower bound may serve as an expected excess return proxy for individual and basket-type assets, is conditionally tight, accounts for the entire risk-neutral distribution of returns, and outperforms existing variance-based models in out-of-sample predictions. Bounds calibrated to realized returns correspond to reasonable risk aversion and prudence. On average, expected stock returns given by the bounds decrease on even weeks of the Federal Open Market Committee cycle. Cross-sectional tests deliver a reasonable market risk premium.

Keywords: recovery; market spanning; expected returns; higher-order moments; option implied (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:2:p:922-939

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