Implied Equity Premium and Market Beta

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