Option-implied information and return prediction

Abstract

We prove the existence of a negative variance risk premium for major US stock indexes and stocks, except for relatively high market capitalization stocks. A zero net investment strategy based on log variance risk premium yields an annualized Sharpe ratio of 0.38 and an annualized certainty equivalent of 4.68%. We find that both the log variance risk premium and option-implied betas are negatively priced in contemporaneous and future returns, which is counter intuitive for option-implied betas, given the expected risk return relation.

Date of Award	21 Oct 2014
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	José Faias (Supervisor)