Option-Implied Measures of Equity Risk

Bo Young Chang, Peter Christoffersen, Kris Jacobs and Gregory Vainberg

Review of Finance, 2011, vol. 16, issue 2, 385-428

Abstract: Equity risk measured by beta is of great interest to both academics and practitioners. Existing estimates of beta use historical returns. Many studies have found option-implied volatility to be a strong predictor of future realized volatility. We find that option-implied volatility and skewness are also good predictors of future realized beta. Motivated by this finding, we establish a set of assumptions needed to construct a beta estimate from option-implied return moments using equity and index options. This beta can be computed using only option data on a single day. It is therefore potentially able to reflect sudden changes in the structure of the underlying company. Copyright 2011, Oxford University Press.

Date: 2011
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Working Paper: Option-Implied Measures of Equity Risk (2009)
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