IDEAS home Printed from
   My bibliography  Save this article

Option-Implied Equity Premium Predictions via Entropic Tilting


  • Konstantinos Metaxoglou
  • Davide Pettenuzzo
  • Aaron Smith


We propose a new method to improve density forecasts of the equity premium using information from options markets. We obtain predictive densities from stochastic volatility (SV) and GARCH models, which we then tilt using the second moment of the risk-neutral distribution implied by options prices while imposing a non-negativity constraint on the equity premium. By combining the backward-looking information contained in the GARCH and SV models with the forward-looking information from options prices, our procedure improves the performance of predictive densities. Using density forecasts of the U.S. equity premium from January 1990 to December 2014, we find that tilting leads to more accurate predictions using statistical and economic criteria.

Suggested Citation

  • Konstantinos Metaxoglou & Davide Pettenuzzo & Aaron Smith, 2019. "Option-Implied Equity Premium Predictions via Entropic Tilting," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 17(4), pages 559-586.
  • Handle: RePEc:oup:jfinec:v:17:y:2019:i:4:p:559-586.

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item


    density forecasts; entropic tilting; equity premium; options; variance risk premium;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:jfinec:v:17:y:2019:i:4:p:559-586.. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.