Option-Implied Measures of Equity Risk

Bo-Young Chang, Peter F. Christoffersen, Kris Jacobs, Gregory Vainberg

Research output: Contribution to journalJournal articleResearchpeer-review

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.
Original languageEnglish
JournalReview of Finance (Print)
Volume16
Issue number2
Pages (from-to)385-428
ISSN1572-3097
DOIs
Publication statusPublished - Apr 2012

Cite this

Chang, Bo-Young ; Christoffersen, Peter F. ; Jacobs, Kris ; Vainberg, Gregory. / Option-Implied Measures of Equity Risk. In: Review of Finance (Print). 2012 ; Vol. 16, No. 2. pp. 385-428.
@article{4b6d9aac8da84ecbb7ff42685f0ad5fe,
title = "Option-Implied Measures of Equity Risk",
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.",
author = "Bo-Young Chang and Christoffersen, {Peter F.} and Kris Jacobs and Gregory Vainberg",
year = "2012",
month = "4",
doi = "10.1093/rof/rfq029",
language = "English",
volume = "16",
pages = "385--428",
journal = "Review of Finance",
issn = "1572-3097",
publisher = "Oxford University Press",
number = "2",

}

Option-Implied Measures of Equity Risk. / Chang, Bo-Young; Christoffersen, Peter F.; Jacobs, Kris; Vainberg, Gregory.

In: Review of Finance (Print), Vol. 16, No. 2, 04.2012, p. 385-428.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - Option-Implied Measures of Equity Risk

AU - Chang, Bo-Young

AU - Christoffersen, Peter F.

AU - Jacobs, Kris

AU - Vainberg, Gregory

PY - 2012/4

Y1 - 2012/4

N2 - 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.

AB - 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.

U2 - 10.1093/rof/rfq029

DO - 10.1093/rof/rfq029

M3 - Journal article

VL - 16

SP - 385

EP - 428

JO - Review of Finance

JF - Review of Finance

SN - 1572-3097

IS - 2

ER -