Implied Equity Premium and Market Beta

51 Pages Posted: 10 Feb 2021

See all articles by Victor Chow

Victor Chow

West Virginia University - Department of Finance

Jiahao Gu

West Virginia University - Department of Finance

Zhan Wang

Research Center of Finance, Shanghai Business School

Date Written: January 6, 2021

Abstract

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

Chow, Victor and Gu, Jiahao and Wang, Zhan, Implied Equity Premium and Market Beta (January 6, 2021). Available at SSRN: https://ssrn.com/abstract=3761471 or http://dx.doi.org/10.2139/ssrn.3761471

Victor Chow

West Virginia University - Department of Finance ( email )

P. O. Box 6025
Morgantown, WV 26506
United States

Jiahao Gu (Contact Author)

West Virginia University - Department of Finance ( email )

Morgantown, WV 26506
United States

Zhan Wang

Research Center of Finance, Shanghai Business School ( email )

2271 West Zhong Shan Road
Shanghai, Shanghai 200235
China

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