The Conditional Expected Market Return

108 Pages Posted: 11 Sep 2017 Last revised: 13 Oct 2020

See all articles by Fousseni Chabi-Yo

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Johnathan Loudis

University of Notre Dame - Mendoza College of Business

Date Written: November 18, 2019

Abstract

We derive lower and upper bounds on the conditional expected excess market return that are related to risk-neutral volatility, skewness, and kurtosis indexes. The bounds can be calculated in real time using a cross section of option prices. The bounds require a no-arbitrage assumption, but do not depend on distributional assumptions about market returns or past observations. The bounds are highly volatile, positively skewed, and fat tailed. They imply that the term structure of expected excess holding period returns is decreasing during turbulent times and increasing during normal times, and that the expected excess market return is on average 5.2%.

Keywords: Equity Risk Premium, Risk Neutral Moments, Preferences

JEL Classification: E44, G1

Suggested Citation

Chabi-Yo, Fousseni and Loudis, Johnathan, The Conditional Expected Market Return (November 18, 2019). Chabi-Yo, F., Loudis, J., 2020. The conditional expected market return. Journal of Financial Economics 137 (3), 752-786., Available at SSRN: https://ssrn.com/abstract=3033936 or http://dx.doi.org/10.2139/ssrn.3033936

Fousseni Chabi-Yo (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Johnathan Loudis

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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