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On Estimating an Asset's Implicit Beta

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  • Sven Husmann
  • Andreas Stephan

Abstract

Siegel (1995) has developed a technique with which the systematic risk of a security (beta) can be estimated without recourse to historical capital market data. Instead, beta is estimated implicitly from the current market prices of exchange options that enable the exchange of a security against shares on the market index. Because this type of exchange options is not currently traded on the capital markets, Siegel's technique cannot yet be used in practice. This article will show that beta can also be estimated implicitly from the current market prices of plain vanilla options, based on the Capital Asset Pricing Model. We provide empirical evidence on implicit betas using prices of exchange options from the EUREX over years 2000 to 2004.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44905.de/dp640.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 640.

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Length: 20 p.
Date of creation: 2006
Date of revision:
Handle: RePEc:diw:diwwpp:dp640

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Keywords: Capital Asset Pricing Model; Beta; Option Pricing;

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References

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  1. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
  2. Andrew F. Siegel, 1995. "Measuring Systematic Risk Using Implicit Beta," Management Science, INFORMS, vol. 41(1), pages 124-128, January.
  3. Campa, J.M. & Chang, P.H.K., 1995. "The Forecasting Ability of Correlations Implied in Foreign Exchange Options," Papers 95-26, Columbia - Graduate School of Business.
  4. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October.
  5. Yacine Ait-Sahalia & Andrew W. Lo, 2000. "Nonparametric Risk Management and Implied Risk Aversion," NBER Working Papers 6130, National Bureau of Economic Research, Inc.
  6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  7. Berk, Jonathan B, 1995. "A Critique of Size-Related Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 275-86.
  8. Blair, Bevan J. & Poon, Ser-Huang & Taylor, Stephen J., 2001. "Forecasting S&P 100 volatility: the incremental information content of implied volatilities and high-frequency index returns," Journal of Econometrics, Elsevier, vol. 105(1), pages 5-26, November.
  9. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
  10. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-32, December.
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Cited by:
  1. Baule, Rainer & Korn, Olaf & Sa├čning, Sven, 2013. "Which beta is best? On the information content of option-implied betas," CFR Working Papers 13-11, University of Cologne, Centre for Financial Research (CFR).
  2. Husmann, Sven & Todorova, Neda, 2011. "CAPM option pricing," Finance Research Letters, Elsevier, vol. 8(4), pages 213-219.

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