Forward-Looking Betas

59 Pages Posted: 17 Mar 2006 Last revised: 2 May 2008

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Gregory Vainberg

McGill University - Desautels Faculty of Management

Multiple version iconThere are 2 versions of this paper

Date Written: April 25, 2008


Few issues are more important for finance practice than the computation of market betas. Existing approaches compute market betas using historical data. While these approaches differ in terms of statistical sophistication and the modeling of the time-variation in the betas, they are all backward-looking. This paper introduces a radically different approach to estimating market betas. Using the tools in Bakshi and Madan (2000) and Bakshi, Kapadia and Madan (2003) we employ the information embedded in the prices of individual stock options and index options to compute our forward-looking market beta at the daily frequency. This beta can be computed using option data for a single day, and is able to reflect sudden changes in the structure of the underlying company. Based on an empirical investigation of daily cross-sections of option contracts on thirty underlying companies, we conclude that these forward-looking betas contain information relevant for forecasting future betas that is not contained in historical betas.

Keywords: Market beta, CAPM, historical, forward-looking, option-implied, capital budgeting, event studies, model-free volatility, model-free skewness

JEL Classification: G11, G12, G31

Suggested Citation

Christoffersen, Peter and Jacobs, Kris and Vainberg, Gregory, Forward-Looking Betas (April 25, 2008). EFA 2007 Ljubljana Meetings, AFA 2008 NEW ORLEANS MEETINGS, Available at SSRN: or

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
416-946-5511 (Phone)

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Gregory Vainberg

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1

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