Review of Financial Studies Vol. 33 No. 4 2020
A Bound on Expected Stock Returns
Abstract
We present a sufficient condition under which the prices of options written on a particular stock can be aggregated to calculate a lower bound on the expected returns of that stock. The sufficient condition imposes a restriction on a combination of the stock’s systematic and idiosyncratic risk. The lower bound is forward-looking and can be calculated on a high-frequency basis. We estimate the bound empirically and study its cross-sectional properties. We find that the bound increases with beta and book-to-market ratio and decreases with size and momentum. The bound provides an economically meaningful signal about future stock returns.
- DOI
- 10.1093/rfs/hhz075
- Volume
- 33
- Issue
- 4
- Pages
- 1565-1617
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref