Firm Fundamentals and Variance Risk Premiums

55 Pages Posted: 29 Nov 2015 Last revised: 19 Jan 2016

Date Written: January 18, 2016

Abstract

We develop a tractable valuation model which shows that future asset returns are predictably related to two firm characteristics, book-to-market (bm) and return on equity (roe), because these measures carry information about priced risk. The model we derive predicts a negative relation between expected variance returns embedded in option prices (variance risk premiums) and both bm and roe. We confirm this prediction using a variety of empirical specifications. Our results show that accounting-based characteristics simultaneously inform investors about cash flows as well as the priced risk of those cash flows.

Keywords: Fundamental Analysis, Valuation, Stock Returns, Varance Risk Premiums, Variance Returns, Option Returns

Suggested Citation

Lyle, Matthew R. and Naughton, James P., Firm Fundamentals and Variance Risk Premiums (January 18, 2016). Available at SSRN: https://ssrn.com/abstract=2696183 or http://dx.doi.org/10.2139/ssrn.2696183

Matthew R. Lyle (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

James P. Naughton

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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