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Cross-Sectional Variation of Risk-targeting Option Portfolios

Author

Listed:
  • Liuren Wu
  • Yaofei Xu

Abstract

Options contracts are listed on thousands of stocks with different numbers of contracts per stock. This paper proposes to construct four risk-targeting portfolios to consolidate information in all the option contracts on each stock. A cross-sectional regression identifies the market price of risk on each risk source for each stock at any given date. The market price of risk estimate strongly predicts the excess return of the corresponding risk-targeting portfolio. Long-short portfolio construction on the risk-targeting portfolios in proportion to the market price of risk estimates generates highly positive average excess returns per unit risk across all four risk dimensions.

Suggested Citation

  • Liuren Wu & Yaofei Xu, 2026. "Cross-Sectional Variation of Risk-targeting Option Portfolios," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 16(1), pages 133-161.
    • Handle: RePEc:oup:rasset:v:16:y:2026:i:1:p:133-161.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raaf012
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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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