Forward-Looking Information on Growth and Uncertainty Implied by Derivative Securities: Evidence from an Emerging Market
50 Pages Posted: 8 Oct 2019
Date Written: September 27, 2019
In this paper, we investigate investors' expectations on economic growth and uncertainty risk implied by derivative securities. Empirical evidence on investors' expectations implied by derivative securities has been intensively studied in the U.S. and other developed markets, however, such evidence still seems to be rare for emerging markets. Using high frequency data of the Taiwan Stock Exchange (TAIEX) weighted index and its derivatives from Jan-02-2003 to Dec-31-2014, we construct time series of implied dividends, variance risk premium and higher risk-neutral moments. We find that term structure of the implied dividend yield and variance risk premium have some abilities on predicting the excess return of the TAIEX weighted index and growth of industrial production index of Taiwan. We also demonstrate that there is a strong and positive relation between the risk-neutral skewness and options slope, which is in line with what previous literature found in the U.S. stock market.
Keywords: Implied dividend, Risk neutral kurtosis, Risk neutral skewness, Variance risk premium
JEL Classification: G12, G14, G17
Suggested Citation: Suggested Citation