Implied Equity Premium and Market Beta
51 Pages Posted: 10 Feb 2021
Date Written: January 6, 2021
Martin (2017) shows that the arbitrage-free measure of return-volatility mimicked by a portfolio of options contracts is a close approximation of ex-ante equity risk premium. We argue, nevertheless, the left-tail volatility-asymmetry downward bias his (symmetric) SVIX approach. This paper provides a simple procedure to correct this bias by adding a risk-neutral measure of volatility-asymmetry (AVIX2) to the SVIX2. The option-implied market beta of individual stocks is a weighted sum of that of SVIX and AVIX. Empirically, our findings suggest these implied betas possess significant predictability of return and the hedging ability against bear/crashing markets.
Keywords: Volatility-asymmetry, Implied Equity Premium, Implied Beta, VIX, SVIX, AVIX
JEL Classification: D81, G02, G11, G12
Suggested Citation: Suggested Citation