Implied Equity Premium and Market Beta

Abstract

Martin (2017) shows that the arbitrage-free measure of return-volatility mimicked by a portfolio of options contracts is a close approximation of ex-ante equity risk premium. We argue, nevertheless, the left-tail volatility-asymmetry downward bias his (symmetric) SVIX approach. This paper provides a simple procedure to correct this bias by adding a risk-neutral measure of volatility-asymmetry (AVIX2) to the SVIX2. The option-implied market beta of individual stocks is a weighted sum of that of SVIX and AVIX. Empirically, our findings suggest these implied betas possess significant predictability of return and the hedging ability against bear/crashing markets.