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Ex Ante Stock Market Return Volatility Implied by the OEX Option Premium
Author(s) -
Weber Carlene E.
Publication year - 1996
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1996.tb00888.x
Subject(s) - economics , econometrics , conditional variance , dividend , volatility (finance) , portfolio , variance risk premium , financial economics , stock (firearms) , variance (accounting) , empirical evidence , stock market , ex ante , implied volatility , volatility risk premium , autoregressive conditional heteroskedasticity , finance , mechanical engineering , philosophy , accounting , macroeconomics , epistemology , engineering , paleontology , horse , biology
Previous empirical evidence suggests that stock return volatility expectations change over time, but the existing models of time‐varying variance lack a theoretical structure that is rigorously linked to the efficient markets dividend discount model. This paper develops and tests such a model. The conditional forecast variance of the return on the stock market portfolio is expressed as a linear combination of the adjusted conditional forecast variance of the interest rate and the dividend growth rate. An empirical test using the implied variance of the S&P 100 index option provides evidence that supports the model's predictions.