Publication Type

Working Paper

Publication Date

7-2017

Abstract

We demonstrate that an ex-ante measure of expected returns based on analyst price targets is highly related to the market's required rate of return. We then show that ex-ante measures of volatility, skewness, and kurtosis derived from option prices are positively related to ex-ante expected returns. While expected returns are related to both systematic and unsystematic variance risk, only the unsystematic components of skewness and kurtosis are important for explaining the cross-section of expected stock returns. The results are consistent using different measures of ex-ante risk and robust to controls for other variables related to stock returns and analyst bias.

Keywords

Risk-Neutral Moments, Option-Implied Risk, Ex-Ante Expected Stock Returns, Price Targets

Discipline

Finance and Financial Management

Research Areas

Finance

First Page

1

Last Page

81

Edition

82

Publisher

Georgetown McDonough School of Business Research Paper

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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