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Forward-Looking Betas

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Author Info

  • Peter Christoffersen
  • Kris Jacobs
  • Gregory Vainberg

    ()
    (School of Economics and Management, University of Aarhus, Denmark and CREATES)

Abstract

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.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2007-39.

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Length: 59
Date of creation: 22 Nov 2007
Date of revision:
Handle: RePEc:aah:create:2007-39

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: market beta; CAPM; historical; forward-looking; option-implied; capital budgeting; event studies; model-free moments;

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References

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Cited by:
  1. Taylor, Stephen J. & Yadav, Pradeep K. & Zhang, Yuanyuan, 2009. "Cross-sectional analysis of risk-neutral skewness," CFR Working Papers 09-11, University of Cologne, Centre for Financial Research (CFR).
  2. Cosemans, M. & Frehen, R.G.P. & Schotman, P.C. & Bauer, R.M.M.J., 2009. "Efficient Estimation of Firm-Specific Betas and its Benefits for Asset Pricing Tests and Portfolio Choice," MPRA Paper 23557, University Library of Munich, Germany.

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