What is the expected return on the market?

Martin, Ian

What is the expected return on the market?

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

Abstract: I derive a lower bound on the equity premium in terms of a volatility index, SVIX, that can be calculated from index option prices. The bound implies that the equity premium is extremely volatile and that it rose above 20% at the height of the crisis in 2008. The time-series average of the lower bound is about 5%, suggesting that the bound may be approximately tight. I run predictive regressions and find that this hypothesis is not rejected by the data, so I use the SVIX index as a proxy for the equity premium and argue that the high equity premia available at times of stress largely reflect high expected returns over the very short run. I also provide a measure of the probability of a market crash, and introduce simple variance swaps, tradable contracts based on SVIX that are robust alternatives to variance swaps.

JEL-codes: E44 G1 (search for similar items in EconPapers)
Date: 2017-02-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (131)

Published in Quarterly Journal of Economics, 1, February, 2017, 132(1), pp. 367 - 433. ISSN: 0033-5533

Downloads: (external link)
http://eprints.lse.ac.uk/67036/ Open access version. (application/pdf)

Related works:
Journal Article: What is the Expected Return on the Market? (2017)
Working Paper: What is the expected return on the market? (2016)
Working Paper: What is the Expected Return on the Market? (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:67036

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().