What Is the Expected Return on a Stock?

By Ian Martin, Christian Wagner. Journal of Finance, 2019

131 citations recorded by the source corpus.

We derive a formula that expresses the expected return on a stock in terms of the risk-neutral variance of the market and the stock's excess risk-neutral variance relative to the average stock. These components can be computed from index and stock option prices; the formula has no free parameters. We test the theory in-sample by running panel regressions of stock returns onto risk-neutral variances. The formula performs well at 6-month and 1-year forecasting horizons, and our predictors drive out beta, size, book-to-market, and momentum. Out-of-sample, we find that the formula outperforms a range of competitors in forecasting individual stock returns. Our results suggest that there is considerably more variation in expected returns, both over time and across stocks, than has previously been acknowledged.

View Paper: https://www.semanticscholar.org/paper/1561792c7adafd138b661ed197177356aee16ae6

Citations in the corpus

• Disaster Resilience and Asset Prices (2020, unknown): “Our analysis is related to the asset pricing literature on rare disasters, starting with Rietz (1988), who extends the Lucas (1978) model to include a rare disaster state and shows that this leads to high equity risk premia and low risk-free returns, even with reasonable time discounting and risk pr”