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Implied equity premium and market beta

Author

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  • Wang, Zhan
  • Chow, K. Victor
  • Gu, Jiahao

Abstract

We extend the ex-ante mean-variance (SVIX) asset pricing models of Martin (2017) and Martin-Wagner (2019) to a mean-VIX framework by incorporating higher-moment and co-moment risk in asset pricing, which builds a theoretical connection between equity returns and the commonly used implied volatility—VIX. Our proposed mean-VIX model is risk-neutral with left-tail asymmetries in returns to correct the SVIX approach's downside bias. We derive an option implied market beta of a stock as the weighted average of the betas of SVIX and VIX. Empirically, we develop an investible market portfolio (MKT*) that mimics realized outcomes on the implied market index adjusted for SVIX and VIX. Based on the MKT*, the mean-VIX asset pricing framework shows superior abilities in return prediction and portfolio allocation.

Suggested Citation

  • Wang, Zhan & Chow, K. Victor & Gu, Jiahao, 2025. "Implied equity premium and market beta," Finance Research Letters, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finlet:v:78:y:2025:i:c:s1544612325003587
    DOI: 10.1016/j.frl.2025.107095
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    More about this item

    Keywords

    Volatility-asymmetry; Implied equity premium; Implied Beta; VIX; SVIX;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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