Research seminar by Grigory Vilkov(Goethe University): «Measuring Equity Risk with Option-Implied Correlations»
On Thursday, November 10 at 4.30 pm International College of Economics and Finance held Research seminar.
Speaker: Grigory Vilkov (Goethe University)
Theme: «Measuring Equity Risk with Option-Implied Correlations», joint with Adrian Buss
Venue:Pokrovski Bulvar, 11, Room Zh-822
Abstact: We use forward-looking information contained in option prices to estimate option-implied correlations and to construct an option-implied predictor of factor betas. With our implied market betas we find a monotonically increasing relation between return and risk, measured by beta, not detectable with standard rolling window betas. Our implied betas are able to confirm a risk-return relation consistent with linear factor models because they: (i) predict realized betas better in terms of MSE and R2, and (ii) exhibit smaller and less systematic prediction errors across different beta values. We also show that our implied betas do not inherit their predictive qualities from other, already documented, relations between option- based characteristics and future returns. The predictive quality of the implied betas is robust to using various proxies of implied variance, different prediction horizons and various factors.