Title: Equity premium prediction: The role of information from the options market
Authors: Antonis Alexandridis - University of Macedonia (Greece)
Iraklis Apergis - University of Kent (United Kingdom)
Ekaterini Panopoulou - University of Essex (United Kingdom) [presenting]
Nikolaos Voukelatos - University of Kent (United Kingdom)
Abstract: The role of information from the options market in forecasting the equity premium is examined. We provide empirical evidence that the equity premium is predictable out-of-sample using a set of CBOE strategy benchmark indices as predictors. We use a range of econometric approaches to generate a point, quantile and density forecasts of the equity premium, and we find that models based on option variables consistently outperform the historical average benchmark. In addition to statistical gains, using option predictors results in substantial economic benefits for a mean-variance investor, delivering up to a fivefold increase in certainty equivalent returns over the benchmark during the 1996-2021 sample period.