This paper derives a novel methodology for conditional returns on the equity market expected to start in the future, leveraging the informational content of equity derivatives. Unlike traditional approaches that focus on returns from time t to t+1, our study examines returns from t+1 to t+2, with the forecast made at time t. The proposed framework utilizes index option prices and their sensitivities, particularly option gammas, to recover real-world conditional market return dependencies. Empirically, we apply our methodology to options on the S&P 500 index, CBOE VIX futures, and options on VIX futures. Our findings offer new insights into the forward-looking nature of market expectations embedded in derivative prices and enhance our understanding of the dynamics of expected subsequent period returns.
About the speaker
Dr. Weidong Tian joined the Belk College faculty in 2008 and is currently a professor of finance and distinguished professor of risk management and insurance. Prior to coming to UNC Charlotte, Dr. Tian served as a faculty member at the University of Waterloo and a visiting scholar at the Sloan School of Management at MIT.
His primary research interests are asset pricing, derivatives, and risk management. Dr. Tian has published in numerous top-tier academic journals, including Review of Financial Studies, Management Science, Journal of Economic Theory, Journal of Economic Dynamics and Control, Mathematical Finance, and Journal of Risk and Insurance. He also held various positions in financial institutions before joining UNC Charlotte.
