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Predicting the Equity Market with Option Implied Variables

Autor: Marcel Prokopczuk and Björn Tharann and Chardin Wese Simen
Nummer: 619, Nov 2017, pp. 55
JEL-Class: G10, G11, G17

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) 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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