Prokopczuk, Marcel Tharann, Björn Wese Simen, Chardin
Year of Publication:
Hannover Economic Papers (HEP) 619
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.
Equity Premium Option Implied Information Portfolio Choice Predictability Timing Strategies