Review of Finance Vol. 16 No. 2 2012

Option-Implied Measures of Equity Risk

Bo Young Chang¹; Peter Christoffersen^1,2,3; Kris Jacobs^4,5; Gregory Vainberg¹

¹ 1Desautels Faculty of Management, McGill University · ² 2Rotman School of Management, University of Toronto · ³ 3Copenhagen Business School · ⁴ 4University of Houston · ⁵ 5Tilburg University

Abstract

Equity risk measured by beta is of great interest to both academics and practitioners. Existing estimates of beta use historical returns. Many studies have found option-implied volatility to be a strong predictor of future realized volatility. We find that option-implied volatility and skewness are also good predictors of future realized beta. Motivated by this finding, we establish a set of assumptions needed to construct a beta estimate from option-implied return moments using equity and index options. This beta can be computed using only option data on a single day. It is therefore potentially able to reflect sudden changes in the structure of the underlying company.

DOI

10.1093/rof/rfq029

Volume

16

Issue

2

Pages

385-428

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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