Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210429 
Year of Publication: 
2018
Series/Report no.: 
Working Paper No. 874
Publisher: 
Queen Mary University of London, School of Economics and Finance, London
Abstract: 
We derive a model-free option-based formula to estimate the contribution of market frictions to expected returns (CFER) within an asset pricing setting. We estimate CFER for the U.S. optionable stocks. We document that CFER is sizable, it predicts stock returns and it subsumes the effect of frictions on expected returns as expected theoretically. The sizable alpha of a long-short portfolio formed on CFER is consistent with the size of market frictions and it is not due to model mis-specification. Moreover, we show that various option-implied measures proxy CFER, thus providing a theoretical explanation for their ability to predict stock returns.
Subjects: 
Alpha
Asset pricing
Implied volatility spread
Limits of arbitrage
Market frictions
Return predictability
JEL: 
C13
G12
G13
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.