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
Citation
BALI, Turan G.; HU, Jianfeng; and MURRAY, Scott.
Analyst price target expected returns and option implied risk. (2014). 1-71.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/5461
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.2516937