A Bound on Expected Stock Returns
Review of Financial Studies, Forthcoming
100 Pages Posted: 1 Feb 2018 Last revised: 23 Mar 2020
Date Written: July 1, 2017
We present a sufficient condition under which the prices of options written on a particular stock can be aggregated to calculate a lower bound on the expected returns of that stock. The sufficient condition imposes a restriction on a combination of the stock's systematic and idiosyncratic risk. The lower bound is forward-looking and can be calculated on a high-frequency basis. We estimate the lower bound empirically and study its cross-sectional properties. We find that the bound increases with beta and book-to-market ratio and decreases with size and momentum. The bound also provides an economically meaningful signal on future stock returns.
Suggested Citation: Suggested Citation