What Is the Expected Return on a Stock?

Christian Wagner and Ian Martin
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Christian Wagner: Copenhagen Business School

No 146, 2017 Meeting Papers from Society for Economic Dynamics

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.

Date: 2017
New Economics Papers: this item is included in nep-for
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Citations: View citations in EconPapers (54)

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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? (2016)
Working Paper: What is the expected return on a stock? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:146

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