Recovering Conditional Factor Risk Premia

44 Pages Posted: 1 Apr 2021

See all articles by Ohad Kadan

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Fang Liu

Cornell University

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: November 13, 2020

Abstract

We offer an approach for recovering option-implied time-varying forward-looking risk premia of systematic factors---even if they do not possess actively-traded options. We apply this approach to the market, size, value, and momentum factors. We find that factor premia are highly volatile. Both the market and the value premia tend to be higher during slowdowns and recessions and during turbulent times. By contrast, the momentum premium is higher during periods of high economic growth and low volatility. We use the recovered factor premia to construct trading strategies, which mitigate market and momentum crash risk and to predict returns of individual stocks even if they do not possess traded options.

Suggested Citation

Kadan, Ohad and Liu, Fang and Tang, Xiaoxiao, Recovering Conditional Factor Risk Premia (November 13, 2020). Available at SSRN: https://ssrn.com/abstract=3803993 or http://dx.doi.org/10.2139/ssrn.3803993

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Fang Liu

Cornell University ( email )

Ithaca, NY 14853
United States

Xiaoxiao Tang (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
159
Abstract Views
585
rank
261,929
PlumX Metrics