Abstract

http://ssrn.com/abstract=1806349
 
 

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Riskiness Measures and Expected Returns


Turan G. Bali


Georgetown University - Robert Emmett McDonough School of Business

Nusret Cakici


Fordham University

Fousseni Chabi-Yo


Ohio State University (OSU) - Fisher College of Business

February 17, 2011


Abstract:     
Inspired by Aumann and Serrano (2008) and Foster and Hart (2009), we propose risk-neutral options’ implied measures of riskiness and investigate their significance in predicting the cross section of expected returns per unit of risk. The empirical analyses indicate a negative and significant link between the forward looking options’ implied measures of riskiness and future stock returns. Stocks in the lowest riskiness portfolio have economically and statistically higher risk-adjusted returns than those in the highest riskiness portfolio. These results are robust to controls for market beta, size, book-to-market, momentum, short-term reversal, and liquidity of individual stocks. Controlling for the risk-neutral measure of skewness and the widely used measures of volatility and downside risk (value-at-risk and expected shortfall) does not affect the significant predictive power of riskiness. The paper also introduces alternative measures of riskiness for the aggregate stock market and shows that aggregate riskiness successfully predicts future economic downturns.

Number of Pages in PDF File: 51

Keywords: Riskiness, economic index of riskiness, operational measure of riskiness, risk-neutral measures, stock returns

JEL Classification: G11, G12, G14, G33

working papers series


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Date posted: April 11, 2011 ; Last revised: February 27, 2012

Suggested Citation

Bali, Turan G. and Cakici, Nusret and Chabi-Yo, Fousseni, Riskiness Measures and Expected Returns (February 17, 2011). Available at SSRN: http://ssrn.com/abstract=1806349 or http://dx.doi.org/10.2139/ssrn.1806349

Contact Information

Turan G. Bali (Contact Author)
Georgetown University - Robert Emmett McDonough School of Business ( email )
3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)
HOME PAGE: http://faculty.msb.edu/tgb27/index.html

Nusret Cakici
Fordham University ( email )
Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)
Fousseni Chabi-Yo
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
614 292 8477 (Phone)
HOME PAGE: http://fisher.osu.edu/fin/faculty/chabi-yo/

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