Generalized Bounds on the Conditional Expected Excess Return on Individual Stocks

78 Pages Posted: 28 Apr 2020 Last revised: 6 Jul 2021

See all articles by Fousseni Chabi-Yo

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Chukwuma Dim

Frankfurt School of Finance & Management

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: April 4, 2020

Abstract

We derive generalized bounds on conditional expected excess returns that can be computed from option prices. The generalized lower bound (GLB) may serve as an expected excess return proxy for individual and basket-type assets, is conditionally tight, accounts for the entire risk-neutral distribution of returns, and outperforms existing variance-based models in out-of-sample predictions. Bounds calibrated to realized returns correspond to reasonable risk aversion and prudence. On average, expected stock returns given by the bounds decrease on even weeks of the FOMC cycle. Cross-sectional tests deliver a reasonable market risk premium.

Keywords: Recovery, market spanning, expected returns, higher-order moments, option-implied, FOMC cycle

JEL Classification: G11, G12, G13, G17

Suggested Citation

Chabi-Yo, Fousseni and Dim, Chukwuma and Vilkov, Grigory, Generalized Bounds on the Conditional Expected Excess Return on Individual Stocks (April 4, 2020). Available at SSRN: https://ssrn.com/abstract=3565130 or http://dx.doi.org/10.2139/ssrn.3565130

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Chukwuma Dim

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://sites.google.com/view/chukwumadim/

Grigory Vilkov (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.vilkov.net

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