Analyst price target expected returns and option implied risk
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...
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sg-smu-ink.lkcsb_research-64602020-08-13T01:50:19Z Analyst price target expected returns and option implied risk BALI, Turan G. HU, Jianfeng MURRAY, Scott 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. 2014-12-01T08:00:00Z text application/pdf https://ink.library.smu.edu.sg/lkcsb_research/5461 info:doi/10.2139/ssrn.2516937 https://ink.library.smu.edu.sg/context/lkcsb_research/article/6460/viewcontent/SSRN_id2516937.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Risk-Neutral Moments Option-Implied Risk Ex-Ante Expected Stock Returns Price Targets Finance and Financial Management Portfolio and Security Analysis |
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Risk-Neutral Moments Option-Implied Risk Ex-Ante Expected Stock Returns Price Targets Finance and Financial Management Portfolio and Security Analysis BALI, Turan G. HU, Jianfeng MURRAY, Scott Analyst price target expected returns and option implied risk |
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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. |
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text |
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BALI, Turan G. HU, Jianfeng MURRAY, Scott |
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BALI, Turan G. HU, Jianfeng MURRAY, Scott |
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BALI, Turan G. |
title |
Analyst price target expected returns and option implied risk |
title_short |
Analyst price target expected returns and option implied risk |
title_full |
Analyst price target expected returns and option implied risk |
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Analyst price target expected returns and option implied risk |
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Analyst price target expected returns and option implied risk |
title_sort |
analyst price target expected returns and option implied risk |
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Institutional Knowledge at Singapore Management University |
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2014 |
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https://ink.library.smu.edu.sg/lkcsb_research/5461 https://ink.library.smu.edu.sg/context/lkcsb_research/article/6460/viewcontent/SSRN_id2516937.pdf |
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