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Forward-Looking Betas

Author

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  • 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.

Suggested Citation

  • Peter Christoffersen & Kris Jacobs & Gregory Vainberg, 2007. "Forward-Looking Betas," CREATES Research Papers 2007-39, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2007-39
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    File URL: https://repec.econ.au.dk/repec/creates/rp/07/rp07_39.pdf
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    Cited by:

    1. 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.
    2. T.G. Saji, 2018. "Predicting Market Betas," Paradigm, , vol. 22(2), pages 160-174, December.
    3. Byeong-Je An & Andrew Ang & Turan G. Bali & Nusret Cakici, 2014. "The Joint Cross Section of Stocks and Options," Journal of Finance, American Finance Association, vol. 69(5), pages 2279-2337, October.
    4. Guglielmo Maria Caporale & Luis A. Gil-Alana & Miguel Martin-Valmayor, 2020. "Persistence in the Realized Betas: Some Evidence for the Spanish Stock Market," CESifo Working Paper Series 8171, CESifo.
    5. 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).

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    More about this item

    Keywords

    market beta; CAPM; historical; forward-looking; option-implied; capital budgeting; event studies; model-free moments;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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