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
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
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Persistent link: https://EconPapers.repec.org/RePEc:han:dpaper:dp-619
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