Estimating expected excess returns using historical and option-implied volatility

Corrado, Charles J and Miller, Thomas W. Jr. 2006, Estimating expected excess returns using historical and option-implied volatility, Journal of financial research, vol. 29, no. 1, Spring, pp. 95-112.

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Title Estimating expected excess returns using historical and option-implied volatility
Author(s) Corrado, Charles J
Miller, Thomas W. Jr.
Journal name Journal of financial research
Volume number 29
Issue number 1
Season Spring
Start page 95
End page 112
Publisher Wiley - Blackwell
Place of publication Oxford, England
Publication date 2006
ISSN 0270-2592
1475-6803
Keyword(s) G11
G14
C53
reward-to-risk
returns
volatility
Summary We test the relation between expected and realized excess returns for the S&P 500 index from January 1994 through December 2003 using the proportional reward-to-risk measure to estimate expected returns. When risk is measured by historical volatility, we find no relation between expected and realized excess returns. In contrast, when risk is measured by option-implied volatility, we find a positive and significant relation between expected and realized excess returns in the 1994–1998 subperiod. In the 1999–2003 subperiod, the option-implied volatility risk measure yields a positive, but statistically insignificant, risk-return relation. We attribute this performance difference to the fact that, in the 1994–1998 subperiod, return volatility was lower and the average return was much higher than in the 1999–2003 subperiod, thereby increasing the signal-to-noise ratio in the latter subperiod.
Notes Published Online: 25 Jan 2006
Language eng
Field of Research 150205 Investment and Risk Management
HERDC Research category C1.1 Refereed article in a scholarly journal
Persistent URL http://hdl.handle.net/10536/DRO/DU:30019583

Document type: Journal Article
Collection: School of Accounting, Economics and Finance
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Created: Thu, 17 Sep 2009, 11:59:18 EST by Liz Hau

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