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Session Overview
APE-12: Asset Price Predictability II
Friday, 25/Aug/2017:
10:30am - 12:00pm

Session Chair: Loriana Pelizzon, Goethe University Frankfurt
Location: SN163

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Margin Requirements and Equity Option Returns

Steffen Hitzemann1, Michael Hofmann2, Marliese Uhrig-Homburg2, Christian Wagner3

1The Ohio State University; 2Karlsruhe Institute of Technology; 3Copenhagen Business School

Discussant: Mario Bellia (Goethe University Frankfurt, SAFE)

In equity option markets, traders face margin requirements both for the options themselves and for hedging-related positions in the underlying stock market. We show that these requirements carry a significant "margin premium" in the cross-section of equity option returns. The sign of the margin premium depends on demand pressure: If end-users are on the long side of the market, option returns decrease with margins, while they increase otherwise. Our results are statistically and economically significant and robust to different margin specifications and various control variables. We explain our findings by a model of funding-constrained derivatives dealers that require compensation for satisfying end-users’ option demand.

EFA2017-398-APE-12-Hitzemann-Margin Requirements and Equity Option Returns.pdf

Equity Premium Predictability from Cross-Sectorial Downturns

Jose Faias1, Juan Zambrano2

1Católica Lisbon School of Business and Economics; 2University of Reading

Discussant: Grigory Vilkov (Frankfurt School of Finance and Management)

We illustrate the role of left tail mean (LTM) for the equity risk premium (ERP) predictability. LTM measures the average of pairwise left tail dependency among major equity sectors incorporating endogenous shocks that are imperceptible at the aggregate level. LTM, as variance risk premium, significantly predicts the ERP in- and out-of-sample, which is not the case with the other commonly used predictors. Ceteris paribus, an increase of two standard deviations in the LTM - in a time-varying disaster-risk consumption-based asset pricing model - causes an increase of 0.70% in the ERP. This paper contributes to the debate of ERP predictability.

EFA2017-850-APE-12-Faias-Equity Premium Predictability from Cross-Sectorial Downturns.pdf

Gold, Platinum, and Expected Stock Returns (paper withdrawn)

Darien Huang

Cornell University

Discussant: Paola Pederzoli (University of Geneva)

The ratio of gold to platinum prices (GP) reveals persistent variation in risk and proxies for an important economic state variable. GP predicts future stock returns in the time-series, explains stock return variation in the cross-section, and is significantly correlated with option-implied tail risk measures. Contrary to conventional wisdom, gold prices fall in recessions, albeit by less than platinum prices. A model featuring recursive preferences, time-varying tail risk, and preference shocks for gold and platinum can account for asset pricing dynamics of equity, gold, and platinum, rationalize the return predictability, and explain why gold prices fall in bad times.

EFA2017-1875-APE-12-Huang-Gold, Platinum, and Expected Stock Returns.pdf

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