Predicting the equity market with option-implied variables. Issue 10 (3rd July 2019)

• Record Type: Journal Article
• Authors: Hollstein, Fabian; Prokopczuk, Marcel; Tharann, Björn; Wese Simen, Chardin
• Is Part Of: European journal of finance. Volume 25:Issue 10(2019)
• Page Start: 937
• Page End: 965
• Publication Date: 2019-07-03
• Subjects: Equity premium -- option-implied information -- portfolio choice -- predictability -- timing strategies; G10 -- G11 -- G17; Finance -- Periodicals; Finance -- Europe -- Periodicals; International finance -- Periodicals; 332.094
• DOI: 10.1080/1351847X.2018.1556176
• Languages: English
• ISSNs: 1351-847X

Abstract

Abstract : We comprehensively analyze the predictive power of several option-implied variables for monthly S&P 500 excess returns and realized variance. The correlation risk premium ( CRP ) and the variance risk premium ( VRP ) emerge as strong predictors of both excess returns and realized variance. This is true both in- and out-of-sample. Our results also reveal that statistical evidence of predictability does not necessarily lead to economic gains. However, a timing strategy based on the CRP leads to utility gains of more than 5.03% per annum. Forecast combinations provide stable forecasts for both excess returns and realized variance, and add economic value.