Predicting the equity market with option implied variables

Marcel Prokopczuk , Björn Tharann and Chardin Wese Simen

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) emerges as a strong predictor of both excess returns and realized variance. This is true both in- and out-of-sample. A timing strategy based on the CRP leads to utility gains of more than 4.63% per annum. In contrast, the variance risk premium (VRP), which strongly predicts excess returns, does not lead to economic gains.

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Year of publication:	2017
Authors:	Prokopczuk, Marcel ; Tharann, Björn ; Wese Simen, Chardin
Publisher:	[Hannover] : Wirtschaftswissenschaftliche Fakultät der Leibniz Universität Hannover
Subject:	Equity Premium \| Option Implied Information \| Portfolio Choice \| Predictability \| Timing Strategies \| Portfolio-Management \| Portfolio selection \| Prognoseverfahren \| Forecasting model \| Risikoprämie \| Risk premium \| Optionsgeschäft \| Option trading \| Aktienmarkt \| Stock market \| Kapitaleinkommen \| Capital income \| Optionspreistheorie \| Option pricing theory \| Statistische Verteilung \| Statistical distribution \| Volatilität \| Volatility