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Predicting the Equity Market with Option Implied Variables

Marcel Prokopczuk (), Björn Tharann and Chardin Wese Simen

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: 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) emerges as a strong predictor of both excess returns and realized variance. This is true both in- and out-of-sample. A timing strategy based on the CRP leads to utility gains of more than 4.63% per annum. In contrast, the variance risk premium (VRP), which strongly predicts excess returns, does not lead to economic gains.

Keywords: Equity Premium; Option Implied Information; Portfolio Choice; Predictability; Timing Strategies (search for similar items in EconPapers)
JEL-codes: G10 G11 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-upt
Date: 2017-11
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