Cross-Sectional Variation of Risk-targeting Option Portfolios

Liuren Wu; Yaofei Xu

doi:10.1093/rapstu/raaf012

Cross-Sectional Variation of Risk-targeting Option Portfolios

¹ Zicklin School of Business, Baruch College, The City University of New York , · ² School of Mathematics and Physics, Research Institute of Quantitative Finance, Xi’an Jiaotong Liverpool University ,

The Review of Asset Pricing Studies 2026

Abstract Options contracts are listed on thousands of stocks with different numbers of contracts per stock. This paper proposes to construct four risk-targeting portfolios to consolidate information in all the option contracts on each stock. A cross-sectional regression identifies the market price of risk on each risk source for each stock at any given date. The market price of risk estimate strongly predicts the excess return of the corresponding risk-targeting portfolio. Long-short portfolio construction on the risk-targeting portfolios in proportion to the market price of risk estimates generates highly positive average excess returns per unit risk across all four risk dimensions.

DOI: 10.1093/rapstu/raaf012
Volume: 16 (1)
Pages: 133-161
Language: en
Export: BibTeX
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