Option-Implied Measures of Equity Risk
Review of Finance, Forthcoming
44 Pages Posted: 11 Jun 2009 Last revised: 23 Jan 2012
Date Written: June 1, 2009
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: Suggested Citation