What is the Expected Return on a Stock?

Martin, Ian; Wagner, Christian

doi:10.2139/ssrn.2771464

What is the Expected Return on a Stock?

Journal of Finance, Forthcoming

83 Pages Posted: 28 Apr 2016 Last revised: 30 Aug 2018

See all articles by Ian Martin

Ian Martin

London School of Economics & Political Science (LSE) - Department of Finance

Christian Wagner

WU Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

There are 2 versions of this paper

Date Written: August 27, 2018

Abstract

We derive a formula for the expected return on a stock in terms of the risk-neutral variance of the market and the stock's excess risk-neutral variance relative to the average stock. These quantities can be computed from index and stock option prices; the formula has no free parameters. The theory performs well empirically both in and out of sample. Our results suggest that there is considerably more variation in expected returns, over time and across stocks, than has previously been acknowledged.

Keywords: Equity Returns, Risk Premia, Risk-Neutral Variance, Equity Options

JEL Classification: G11, G12, G13

Suggested Citation: Suggested Citation

Martin, Ian W. R. and Wagner, Christian, What is the Expected Return on a Stock? (August 27, 2018). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2771464 or http://dx.doi.org/10.2139/ssrn.2771464