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Option-Implied Measures of Equity Risk

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  • Bo-Young Chang
  • Peter Christoffersen
  • Kris Jacobs
  • Gregory Vainberg

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. Copyright 2011, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 16 (2011)
Issue (Month): 2 ()
Pages: 385-428

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Handle: RePEc:oup:revfin:v:16:y:2011:i:2:p:385-428

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Cited by:
  1. Kumiega, Andrew & Neururer, Thaddeus & Van Vliet, Ben, 2011. "Independent component analysis for realized volatility: Analysis of the stock market crash of 2008," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 292-302, June.

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