Forecasting International Index Returns using Option-implied Variables

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04 Avril 2018
Types de publication: 
Cahier de recherche
Auteur(s): 
Marie-Hélène Gagnon
Gabriel Power
Axe de recherche: 
Enjeux économiques et financiers
Mots-clés: 
Options
risk-neutral distribution
variance risk premium
return predictability
predictive regressions
international stock market returns
Foster-Hart riskiness
higher-order moments
skewness
Classification JEL: 
C12
C22
G12
G13

This paper investigates international index return predictability using option-implied information. We document the significant predictive power of the variance risk premium (VRP), Foster-Hart risk (FH), and higher-order moments for horizons ranging from 1 to 250 days. Our results from predictive regressions show that these four risk-neutral metrics, which have the advantage of daily updating, perform well internationally. VRP and FH risk are significant predictors for several horizons, including less than one month (VRP) and longer horizons (FH). Risk-neutral skewness and kurtosis are significant for several countries across multiple horizons. Out-of-sample forecasts and utility gain calculations confirm the statistical and economic significance of these risk-neutral variables internationally.

Contact: 

Marie-Hélène Gagnon : FSA ULaval, CRREP, IHEIQ, CEPCI, Marie-Helene.Gagnon@fsa.ulaval.ca
Gabriel J. Power : FSA ULaval, CRREP, CRIB, Gabriel.Power@fsa.ulaval.ca
Dominique Toupin : Université Laval, dominique.toupin.1@ulaval.ca