Implied Equity Premium and Market Beta

59 Pages Posted: 10 Feb 2021 Last revised: 18 May 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: May 17, 2021

Abstract

We extend the ex-ante mean-variance (SVIX) models of Martin (2017) and Martin-Wagner (2019) to a mean-variance-asymmetry (AVIX) framework for incorporating higher-moment and co-moment risk in asset pricing. AVIX is a risk-neutral measure of the left-tail asymmetries in return that corrects the SVIX approach's downside bias. The options implied market beta of equity is a weighted sum of the beta of SVIX and that of AVIX. Empirically, the implied betas possess significant predictability of risk/return relationship and the hedging ability against bear/crashing markets. We develop an investible portfolio MKT* that mimics realized outcomes on the implied market index adjusted for volatility-asymmetry.

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 (May 17, 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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