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Option‐implied betas and the cross section of stock returns
Author(s) -
Harris Richard D. F.,
Li Xuguang,
Qiao Fang
Publication year - 2019
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21936
Subject(s) - economics , portfolio , stock (firearms) , beta (programming language) , econometrics , financial economics , downside risk , computer science , engineering , mechanical engineering , programming language
We investigate the cross‐sectional relationship between stock returns and a number of measures of option‐implied beta. Using portfolio analysis, we show that the method proposed by Buss and Vilkov (2012, The Review of Financial Studies , 2525, 3113–3140) leads to a stronger relationship between implied beta and stock returns than other approaches. However, using the Fama and MacBeth (1973, Journal of Political Economy , 8181, 607–636) cross‐section regression methodology, we show that the relationship is not robust to the inclusion of other firm characteristics. We further show that a similar result holds for implied downside beta. We, therefore, conclude that there is no robust relation between option‐implied beta and returns.