Expected Stock Returns and Option-Implied Rate of Return

Ze-To, S. 2012. Expected Stock Returns and Option-Implied Rate of Return. Journal of Mathematical Finance. 2 (4), pp. 269-279. https://doi.org/10.4236/jmf.2012.24030

TitleExpected Stock Returns and Option-Implied Rate of Return
TypeJournal article
AuthorsZe-To, S.
Abstract

This paper examines the predictability of implied required rate of return (ROI) of individual stock in the cross-section of stock returns. The required rate of return of each stock is implied using its corresponding stock options and used in es-timating the fundamental value of stock. The study finds that stocks with low price to fundamental value have higher future returns. The inferred ROI is compared with other required rate of return derived by CAPM and Fama-French three factor model in return prediction and trading. The findings indicate that the proposed model outperforms the other two models. The forward looking ROI provides a superior estimation of fundamental value than the other two back-looking models and is better able to predict future returns. The empirical results also evidence that the proposed model provides accurate trading signals compared with the other valuation models as well as value benchmarks like price to earnings and dividend yield ratios.

KeywordsImplied Rate of Return; Options
JournalJournal of Mathematical Finance
Journal citation2 (4), pp. 269-279
ISSN2162-2434
2162-2442
Year2012
PublisherScientific Research
Digital Object Identifier (DOI)https://doi.org/10.4236/jmf.2012.24030
Publication dates
PublishedNov 2012

Related outputs

Fundamental Index Aligned and Excess Market Return Predictability
Ze-To, S. 2022. Fundamental Index Aligned and Excess Market Return Predictability. Journal of Forecasting. 41 (3), pp. 592-614. https://doi.org/10.1002/for.2829

Option implied beta and option return
Ze-To, S. 2017. Option implied beta and option return. Applied Economics. 50 (2), pp. 128-142. https://doi.org/1080/00036846.2017.1313958

Asset liquidity and stock returns
Ze-To, S. 2016. Asset liquidity and stock returns. Advances in Accounting. 35, pp. 177-196. https://doi.org/10.1016/j.adiac.2016.08.002

Cross-Section Stock Return and Implied Covariance between Jump and Diffusive Volatility
Ze-To, S. 2015. Cross-Section Stock Return and Implied Covariance between Jump and Diffusive Volatility. Journal of Forecasting. 34 (5), pp. 379-390. https://doi.org/10.1002/for.2348

Correlated implied volatility with jump and cross section of stock returns
Ze-To, S. 2015. Correlated implied volatility with jump and cross section of stock returns. Accounting & Finance. 60 (3), pp. 2007-2037. https://doi.org/10.1111/acfi.12429

Estimating value-at-risk under a Heath––Jarrow––Morton framework with jump
Ze-To, S. 2012. Estimating value-at-risk under a Heath––Jarrow––Morton framework with jump. Applied Economics. 44 (21), pp. 2279-2741. https://doi.org/10.1080/00036846.2011.566198

Earnings management and accrual anomaly across market states and business cycles
Ze-To, S. 2012. Earnings management and accrual anomaly across market states and business cycles. Advances in Accounting. 28 (2), pp. 344-352. https://doi.org/10.1016/j.adiac.2012.09.011

Crisis, Value at Risk and Conditional Extreme Value Theory via the NIG + Jump Model
Ze-To, S. 2012. Crisis, Value at Risk and Conditional Extreme Value Theory via the NIG + Jump Model. Journal of Mathematical Finance. 2 (3), pp. 225-237. https://doi.org/10.4236/jmf.2012.23025

Crisis, Value at Risk, and Conditional Extreme Value Theory via Garch-Jump Model
Ze-To, S. 2010. Crisis, Value at Risk, and Conditional Extreme Value Theory via Garch-Jump Model. Review of Futures Markets. 18 (4), pp. 319-345.

Value at Risk and Conditional Extreme Value Theory via Markov Regime Switching Models
Ze-To, S. 2008. Value at Risk and Conditional Extreme Value Theory via Markov Regime Switching Models. Journal of Futures Markets. 28 (2), pp. 155-181. https://doi.org/10.1002/fut.20293

Pricing and Hedging American Fixed-Income Derivatives with Implied Volatility Structures in the Two-Factor Heath–Jarrow–Morton Model
Ze-To, S. 2002. Pricing and Hedging American Fixed-Income Derivatives with Implied Volatility Structures in the Two-Factor Heath–Jarrow–Morton Model. Journal of Futures Markets. 22 (9), pp. 839-875. https://doi.org/10.1002/fut.10031

Permalink - https://westminsterresearch.westminster.ac.uk/item/w0v28/expected-stock-returns-and-option-implied-rate-of-return


Share this

Usage statistics

37 total views
0 total downloads
These values cover views and downloads from WestminsterResearch and are for the period from September 2nd 2018, when this repository was created.