What is the expected return on a stock?

Ian Martin and Christian Wagner

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We derive a formula that expresses the expected return on a stock in terms of the risk-neutral variance of the market and the stock's excess risk-neutral variance relative to the average stock. These components can be computed from index and stock option prices; the formula has no free parameters. We test the theory in-sample by running panel regressions of stock returns onto risk-neutral variances. The formula performs well at 6-month and 1-year forecasting horizons, and our predictors drive out beta, size, book-to-market, and momentum. Out-of-sample, we find that the formula outperforms a range of competitors in forecasting individual stock returns. Our results suggest that there is considerably more variation in expected returns, both over time and across stocks, than has previously been acknowledged.

JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2016-11-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://eprints.lse.ac.uk/118957/ Open access version. (application/pdf)

Related works:
Journal Article: What Is the Expected Return on a Stock? (2019)
Working Paper: What is the expected return on a stock? (2019)
Working Paper: What Is the Expected Return on a Stock? (2017)
Working Paper: What is the Expected Return on a Stock? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118957

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