Download This PaperThe Options-Inferred Equity Premium and the Slippery Slope of The Negative Correlation Condition
Journal Of Investment Management, 2024 3Q (forthcoming)
35 Pages Posted: 16 Dec 2024
Date Written: July 06, 2017
Abstract
The negative correlation condition (NCC) of Martin (2017) is that cov P t (M T R T , R T) ≤ 0 for all M T , where M T is the SDF and R T is the gross market return. He employs this assumption to derive a lower bound of the equity premium. This paper exploits theoretical and empirical constructions to refute the hypothesis of the NCC. Using options on the S&P 500 index and STOXX 50 equity index, our tests favor rejection. Our empirical counterexamples of M T contradict the universality of the NCC, exhibit variance-dependence and incorporate an increasing region to the return upside.
Keywords: Hypothesis and generality of the negative correlation condition, dark matter property, conditional equity premium, options on S&P 500 equity index and STOXX 50 equity index
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Jinming Xue
Southern Methodist University (SMU) - Finance Department ( email )
United States
(214)-768-4181 (Phone)
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