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Macroeconomic factors and index option returns

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  • Lai, Ya-Wen

Abstract

This study empirically investigates whether macroeconomic factors are priced in the cross-section of index option returns. Macroeconomic factors are extracted from a large panel of 132 economic activity indicators using dynamic factor analysis. The empirical analysis employs linear factor methodology with a factor structure including market return and macroeconomic factors. The results show that the risk premia on inflation, term spread, industrial production, and housing factors are significant. Further, business sales is a useful conditioning factor that drives variation in market betas. These extracted macroeconomic factors provide information that is not fully captured by Fama and French's (2015) investment and profitability factors.

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  • Lai, Ya-Wen, 2017. "Macroeconomic factors and index option returns," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 452-477.
    • Handle: RePEc:eee:reveco:v:48:y:2017:i:c:p:452-477
    DOI: 10.1016/j.iref.2016.11.002
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    Cited by:

    1. Yang, Heejin & Kutan, Ali M. & Ryu, Doojin, 2019. "Volatility information trading in the index options market: An intraday analysis," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 412-426.
    2. Doojin Ryu & Doowon Ryu & Heejin Yang, 2021. "The impact of net buying pressure on index options prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 27-45, January.
    3. Chien‐Chiang Lee & Chi‐Chuan Lee & Donald Lien, 2019. "Do country risk and financial uncertainty matter for energy commodity futures?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(3), pages 366-383, March.

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    More about this item

    Keywords

    Macroeconomic factors; Option returns; Dynamic factor analysis;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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