Serial Dependence in the Stock Market : What Can We Learn from Derivatives?

We derive a model-free expression of the serial dependence coefficients of the stock market returnin terms of the prices of available index options, VIX futures, and VIX options. As a result,we obtain real-time market autocorrelation and regression coefficients between market returnsover two consecutive periods. From a forward-looking perspective, we document a short-termreversal for monthly returns robustly. Moreover, the fading memory belief based on historicalobservations yields comparable market autocorrelation from derivatives, despite a virtually zeromarket autocorrelation calculated by standard statistical method. Furthermore, we show that thederivative information helps to improve the out-of-sample market return prediction