55 Pages Posted: 29 Nov 2015 Last revised: 19 Jan 2016
Date Written: January 18, 2016
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: 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