Which Beta is Best? On the Information Content of Option-Implied Betas

40 Pages Posted: 8 Jan 2014

See all articles by Rainer Baule

Rainer Baule

University of Hagen

Olaf Korn

University of Goettingen (Gottingen)

Sven Sassning

Georg-August-Universität Göttingen

Date Written: January 8, 2014

Abstract

Option-implied betas are a promising alternative to historical beta estimators, because they are inherently forward-looking and can incorporate new information immediately and fully. Recently, different implied beta estimators have been developed in previous literature, but very little is known about their properties and information content. This paper presents a first systematic comparison between six different implied beta estimators, which provides some guidance for applications and identifies directions for further improvements. The main results of the empirical study reveal that betas derived from implied variances are better predictors of realized betas than betas obtained from implied skewness, and that cross-sectional information from all stocks in the market improves beta estimation significantly. We also find that option-implied betas generally have a higher information content in periods of relatively high trading activity in options markets.

Keywords: beta, option-implied information

JEL Classification: G11, G12, G13, G14, G17

Suggested Citation

Baule, Rainer and Korn, Olaf and Sassning, Sven, Which Beta is Best? On the Information Content of Option-Implied Betas (January 8, 2014). Available at SSRN: https://ssrn.com/abstract=2376161 or http://dx.doi.org/10.2139/ssrn.2376161

Rainer Baule (Contact Author)

University of Hagen ( email )

Universitaetsstrasse 41
Hagen, 58097
Germany

Olaf Korn

University of Goettingen (Gottingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany
++49 551 39 7265 (Phone)
++49 551 39 7665 (Fax)

Sven Sassning

Georg-August-Universität Göttingen ( email )

Platz der Göttinger Sieben 5
Göttingen, 37073
Germany

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