Forecasting International Index Returns Using Option-Implied Variables

CRREP working paper serie 2018-07

47 Pages Posted: 10 Jul 2018

See all articles by Marie-Hélène Gagnon

Marie-Hélène Gagnon

Université Laval - Faculté d'Administration

Gabriel Power

Université Laval - Département de Finance et Assurance

Dominique Toupin

Bishop’s University - Williams School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2018

Abstract

This paper investigates international index return predictability using option-implied information. We document the significant predictive power of the variance risk premium (VRP), Foster-Hart risk (FH), and higher-order moments for horizons ranging from 1 to 250 days. Our results from predictive regressions show that these four risk-neutral metrics, which have the advantage of daily updating, perform well internationally. VRP and FH risk are significant predictors for several horizons, including less than one month (VRP) and longer horizons (FH). Risk-neutral skewness and kurtosis are significant for several countries across multiple horizons. Out-of-sample forecasts and utility gain calculations confirm the statistical and economic significance of these risk-neutral variables internationally.

Keywords: Options, risk-neutral distribution, variance risk premium, return predictability, predictive regressions, international stock market returns, Foster-Hart riskiness, higher-order moments,

JEL Classification: C12, C22, G12, G13

Suggested Citation

Gagnon, Marie-Hélène and Power, Gabriel and Toupin, Dominique, Forecasting International Index Returns Using Option-Implied Variables (April 1, 2018). CRREP working paper serie 2018-07, Available at SSRN: https://ssrn.com/abstract=3211447 or http://dx.doi.org/10.2139/ssrn.3211447

Marie-Hélène Gagnon (Contact Author)

Université Laval - Faculté d'Administration ( email )

Quebec G1K 7P4
Canada

Gabriel Power

Université Laval - Département de Finance et Assurance ( email )

Pavillon Palasis-Prince
Quebec G1K 7P4
Canada

Dominique Toupin

Bishop’s University - Williams School of Business ( email )

Canada

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