Publication Type

Working Paper

Version

publishedVersion

Publication Date

12-2014

Abstract

Motivated by the nature of asset pricing models, we investigate the cross-sectional relation between the market's ex-ante view of a stock's risk and the stock's ex-ante expected return. 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. Using this measure, we show that ex-ante measures of volatility, skewness, and kurtosis derived from option prices are positively related to ex-ante expected returns. We then decompose the risk measures into systematic and unsystematic components and find that 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 two different approaches to measuring 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 | Portfolio and Security Analysis

Research Areas

Finance

First Page

1

Last Page

71

Identifier

10.2139/ssrn.2516937

Publisher

SSRN

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.2139/ssrn.2516937

Share

COinS