Option-Implied Measures of Equity Risk

Review of Finance, Forthcoming

44 Pages Posted: 11 Jun 2009 Last revised: 23 Jan 2012

Bo Young Chang

Bank of Canada

Peter Christoffersen

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

Kris Jacobs

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

Gregory Vainberg

McGill University - Desautels Faculty of Management

Date Written: June 1, 2009

Abstract

Equity risk measured by beta is of great interest to both academics and practitioners. Existing estimates of beta use historical returns. Many studies have found option-implied volatility to be a strong predictor of future realized volatility. We find that option-implied volatility and skewness are also good predictors of future realized beta. Motivated by this finding, we establish a set of assumptions needed to construct a beta estimate from option-implied return moments using equity and index options. This beta can be computed using only option data on a single day. It is therefore potentially able to reflect sudden changes in the structure of the underlying company.

Keywords: market beta, CAPM, historical, capital budgeting, model-free moments

JEL Classification: G12

Suggested Citation

Chang, Bo Young and Christoffersen, Peter and Jacobs, Kris and Vainberg, Gregory, Option-Implied Measures of Equity Risk (June 1, 2009). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1416753 or http://dx.doi.org/10.2139/ssrn.1416753

Bo Young Chang

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A0G9
Canada
613-782-8936 (Phone)
613-782-7136 (Fax)

HOME PAGE: http://www.bankofcanada.ca/author/bo-young-chang-2/

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)

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

University of Aarhus - 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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