Forward-Looking Betas

CREATES Research Paper No. 2007-39

61 Pages Posted: 24 Jun 2008

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Gregory Vainberg

McGill University - Desautels Faculty of Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 22, 2007

Abstract

Few issues are more important for finance practice than the computation of market betas. Existing approaches compute market betas using historical data. While these approaches differ in terms of statistical sophistication and the modeling of the time-variation in the betas, they are all backward-looking. This paper introduces a radically different approach to estimating market betas. Using the tools in Bakshi and Madan (2000) and Bakshi, Kapadia and Madan (2003) we employ the information embedded in the prices of individual stock options and index options to compute our forward-looking market beta at the daily frequency. This beta can be computed using option data for a single day, and is able to reflect sudden changes in the structure of the underlying company. Based on an empirical investigation of daily cross-sections of option contracts on thirty underlying companies, we conclude that these forward-looking betas contain information relevant for forecasting future betas that is not contained in historical betas.

Keywords: market beta, CAPM, historical, forward-looking, option-implied, capital budgeting, event studies, model-free moments

JEL Classification: G12

Suggested Citation

Christoffersen, Peter and Jacobs, Kris and Vainberg, Gregory, Forward-Looking Betas (November 22, 2007). CREATES Research Paper No. 2007-39. Available at SSRN: https://ssrn.com/abstract=1150646 or http://dx.doi.org/10.2139/ssrn.1150646

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Gregory Vainberg

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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