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Option-Implied Measures of Equity Risk

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  • Bo-Young Chang
  • Peter Christoffersen
  • Kris Jacobs
  • Gregory Vainberg

Abstract

Equity risk measured by beta is of great interest to both academics and practitioners. Existing estimates of beta use historical returns. Many studies have found option-implied volatility to be a strong predictor of future realized volatility. We find that option-implied volatility and skewness are also good predictors of future realized beta. Motivated by this finding, we establish a set of assumptions needed to construct a beta estimate from option-implied return moments using equity and index options. This beta can be computed using only option data on a single day. It is therefore potentially able to reflect sudden changes in the structure of the underlying company. Copyright 2011, Oxford University Press.

Suggested Citation

  • Bo-Young Chang & Peter Christoffersen & Kris Jacobs & Gregory Vainberg, 2011. "Option-Implied Measures of Equity Risk," Review of Finance, European Finance Association, vol. 16(2), pages 385-428.
    • Handle: RePEc:oup:revfin:v:16:y:2011:i:2:p:385-428
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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