Option-Implied Betas and the Cross Section of Stock Returns

Journal of Futures Markets, Forthcoming

30 Pages Posted: 29 Apr 2018 Last revised: 25 Jun 2018

See all articles by Richard D. F. Harris

Richard D. F. Harris

University of Bristol, School of Accounting and Finance; affiliation not provided to SSRN

Xuguang Li

The People's Bank of China (PBC) - Shanghai Head Office

Fang Qiao

University of International Business and Economics (UIBE) - School of Banking and Finance

Date Written: March 26, 2018

Abstract

We investigate the cross-sectional relationship between stock returns and a number of measures of option-implied beta. Using portfolio analysis, we show that the method proposed by Buss and Vilkov (2012) leads to a stronger relationship between implied beta and stock returns than other approaches. However, using the Fama and MacBeth (1973) cross-section regression methodology, we show that the relationship is not robust to the inclusion of other firm characteristics. We further show that a similar result holds for implied downside beta. We therefore conclude that there is no robust relation between option-implied beta and returns.

Keywords: Option-Implied Beta, Downside Beta, Cross Section, Stock Returns

JEL Classification: G12

Suggested Citation

Harris, Richard D. F. and Li, Xuguang and Qiao, Fang, Option-Implied Betas and the Cross Section of Stock Returns (March 26, 2018). Journal of Futures Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3150127 or http://dx.doi.org/10.2139/ssrn.3150127

Richard D. F. Harris

University of Bristol, School of Accounting and Finance ( email )

United Kingdom

HOME PAGE: http://www.bristol.ac.uk/people/person/Richard-Harris-50ffa5fb-0e86-4458-8e8c-8dace6eb3435/

affiliation not provided to SSRN

Xuguang Li

The People's Bank of China (PBC) - Shanghai Head Office ( email )

181 East Lujiazui Road
Shanghai, 200120
China

Fang Qiao (Contact Author)

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

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