Forecasting International Index Returns using Option-implied Variables

Marie-Hélène Gagnon, Gabriel Power and Dominique Toupin

Cahiers de recherche from Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques

Abstract: This paper investigates international index return predictability using option-implied information. We document the significant predictive power of the variance risk premium (VRP), Foster-Hart risk (FH), and higher-order moments for horizons ranging from 1 to 250 days. Our results from predictive regressions show that these four risk-neutral metrics, which have the advantage of daily updating, perform well internationally. VRP and FH risk are significant predictors for several horizons, including less than one month (VRP) and longer horizons (FH). Risk-neutral skewness and kurtosis are significant for several countries across multiple horizons. Out-of-sample forecasts and utility gain calculations confirm the statistical and economic significance of these risk-neutral variables internationally.

Keywords: Options; risk-neutral distribution; variance risk premium; return predictability; predictive regressions; international stock market returns; Foster-Hart riskiness; higher-order moments; skewness (search for similar items in EconPapers)
JEL-codes: C12 C22 G12 G13 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-for
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:crrecr:1807

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