Details
| Original language | English |
|---|---|
| Pages (from-to) | 937-965 |
| Number of pages | 29 |
| Journal | European Journal of Finance |
| Volume | 25 |
| Issue number | 10 |
| Early online date | 14 Dec 2018 |
| Publication status | Published - 2019 |
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) and the variance risk premium (VRP) emerge as strong predictors of both excess returns and realized variance. This is true both in- and out-of-sample. Our results also reveal that statistical evidence of predictability does not necessarily lead to economic gains. However, a timing strategy based on the CRP leads to utility gains of more than 5.03% per annum. Forecast combinations provide stable forecasts for both excess returns and realized variance, and add economic value.
Keywords
- Equity premium, option-implied information, portfolio choice, predictability, timing strategies
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Economics, Econometrics and Finance (miscellaneous)
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In: European Journal of Finance, Vol. 25, No. 10, 2019, p. 937-965.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Predicting the equity market with option-implied variables
AU - Hollstein, Fabian
AU - Prokopczuk, Marcel
AU - Tharann, Björn
AU - Wese Simen, Chardin
PY - 2019
Y1 - 2019
N2 - 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) and the variance risk premium (VRP) emerge as strong predictors of both excess returns and realized variance. This is true both in- and out-of-sample. Our results also reveal that statistical evidence of predictability does not necessarily lead to economic gains. However, a timing strategy based on the CRP leads to utility gains of more than 5.03% per annum. Forecast combinations provide stable forecasts for both excess returns and realized variance, and add economic value.
AB - 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) and the variance risk premium (VRP) emerge as strong predictors of both excess returns and realized variance. This is true both in- and out-of-sample. Our results also reveal that statistical evidence of predictability does not necessarily lead to economic gains. However, a timing strategy based on the CRP leads to utility gains of more than 5.03% per annum. Forecast combinations provide stable forecasts for both excess returns and realized variance, and add economic value.
KW - Equity premium
KW - option-implied information
KW - portfolio choice
KW - predictability
KW - timing strategies
UR - http://www.scopus.com/inward/record.url?scp=85058703926&partnerID=8YFLogxK
U2 - 10.1080/1351847X.2018.1556176
DO - 10.1080/1351847X.2018.1556176
M3 - Article
AN - SCOPUS:85058703926
VL - 25
SP - 937
EP - 965
JO - European Journal of Finance
JF - European Journal of Finance
SN - 1351-847X
IS - 10
ER -