Option-implied betas and the cross section of stock returns |
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Authors: | Richard D F Harris Xuguang Li Fang Qiao |
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Institution: | 1. Xfi Centre for Finance and Investment, University of Exeter, Exeter, UK;2. The People’s Bank of China Shanghai Head Office, Shanghai, China;3. PBC School of Finance, Tsinghua University, Beijing, China |
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Abstract: | 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. |
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Keywords: | cross section downside beta option-implied beta stock returns |
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