Using options-implied variance, a forward-looking measure of conditional variance, we revisit the debate on the idiosyncratic risk-return relation.

Carlyle Group - Annual Report

In both cross-sectional for individual stocks and time-series for the market index regressions, we find a negative relation between options-implied variance and future stock returns. This paper proposes a novel approach to extracting option-implied equity premia, and empirically examines the information content of these risk premia for forecasting the stock market return.

We propose a new methodology to estimate the empirical pricing kernel implied from option data.

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In contrast to most of the studies in the literature that use an indirect approach, i. Using data on individual stock options, we show that the currently observed option-implied ex ante skewness is positively related to future stock returns. This contrasts with the existing evidence that uses historical stock or option data to estimate skewness and finds a negative skewness-return relation.

Is the pricing of index and individual stock options consistent with a factor model of stock returns? To answer this question, we use returns and option prices for a cross-section of stocks and a market index to carry out an integrated estimation of a multivariate stochastic volatility models with systematic factors and idiosyncratic return components.

Option-Implied Equity Premia and the Predictability of Stock Market Returns by Mehdi Karoui :: SSRN

Option prices contain forward looking information about stock price volatility and, potentially, the probability of bankruptcy. We develop a risk-neutral density RND model consisting of a mixture of two lognormal densities with a probability of bankruptcy.

The shape of the volatility smirk has significant cross-sectional predictive power for future equity returns. Stocks exhibiting the steepest smirks in their traded options underperform stocks with the least pronounced volatility smirks in their options by around The Post-Earnings Announcement Drift PEAD anomaly refers to the tendency of stock prices to continue drifting in the same direction as earnings surprises well through the subsequent earnings announcements; ignoring the autocorrelations in extreme earnings surprises across adjacent quarters.

Currently, the two major competing theories to explain PEAD are: We study whether option-implied conditional expectation of market loss due to tail events, or tail loss measure, contains information about future returns, especially the negative ones.

Our tail loss measure predicts future market returns, magnitude, and probability of the market crashes, beyond and above other option-implied variables. This paper documents a robust new finding that delta-hedged equity option return decreases monotonically with an increase in the idiosyncratic volatility of the underlying stock.

This result can not be explained by standard risk factors. It is distinct from existing anomalies in the stock market or volatility-related option mis-pricing. It is consistent with market imperfections and constrained financial intermediaries. Top Right Menu Support Research Careers Contact Get Qualified for an Evaluation.

February 20th, Abstract: Categories All Research Papers. OptionMetrics White Papers D. Hait, , "Dividend Forecasts, Option Pricing Models, And Implied Volatility Calculations: Why simpler is better".