Predicting the equity market with option-implied variables
Marcel Prokopczuk (),
Björn Tharann and
Chardin Wese Simen
The European Journal of Finance, 2019, vol. 25, issue 10, 937-965
We comprehensively analyze the predictive power of several option-implied variables for monthly S&P 500 excess returns and realized variance. The correlation risk premium (CRP) and the variance risk premium (VRP) emerge as strong predictors of both excess returns and realized variance. This is true both in- and out-of-sample. Our results also reveal that statistical evidence of predictability does not necessarily lead to economic gains. However, a timing strategy based on the CRP leads to utility gains of more than 5.03% per annum. Forecast combinations provide stable forecasts for both excess returns and realized variance, and add economic value.
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Working Paper: Predicting the Equity Market with Option Implied Variables (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:25:y:2019:i:10:p:937-965
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