A Bound on Expected Stock Returns

53 Pages Posted: 1 Feb 2018

See all articles by Ohad Kadan

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: July 1, 2017

Abstract

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 for stocks with liquid option trading. We estimate the lower bound empirically for constituents of the S&P 500 index 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 realized stock returns.

Suggested Citation

Kadan, Ohad and Tang, Xiaoxiao, A Bound on Expected Stock Returns (July 1, 2017). Available at SSRN: https://ssrn.com/abstract=3108006 or http://dx.doi.org/10.2139/ssrn.3108006

Ohad Kadan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

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