Predicting the equity market with option-implied variables

Hollstein, F., Prokopczuk, M., Tharann, B. and Wese Simen, C. (2019) Predicting the equity market with option-implied variables. European Journal of Finance, 25 (10). pp. 937-965. ISSN 1466-4364 doi: 10.1080/1351847X.2018.1556176

Abstract/Summary

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.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/81483
Identification Number/DOI	10.1080/1351847X.2018.1556176
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Taylor and Francis
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