Martin, Ian 
ORCID: 0000-0001-8373-5317
(2017)
What is the expected return on the market?
Quarterly Journal of Economics, 132 (1).
367 - 433.
ISSN 0033-5533
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Abstract
I derive a lower bound on the equity premium in terms of a volatility index, SVIX, that can be calculated from index option prices. The bound implies that the equity premium is extremely volatile and that it rose above 20% at the height of the crisis in 2008. The time-series average of the lower bound is about 5%, suggesting that the bound may be approximately tight. I run predictive regressions and find that this hypothesis is not rejected by the data, so I use the SVIX index as a proxy for the equity premium and argue that the high equity premia available at times of stress largely reflect high expected returns over the very short run. I also provide a measure of the probability of a market crash, and introduce simple variance swaps, tradable contracts based on SVIX that are robust alternatives to variance swaps.
| Item Type: | Article |
|---|---|
| Official URL: | http://qje.oxfordjournals.org/ |
| Additional Information: | © 2016 The Author © CC BY-NC-ND 4.0 |
| Divisions: | Finance |
| Subjects: | H Social Sciences > HG Finance |
| JEL classification: | E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy G - Financial Economics > G1 - General Financial Markets |
| Date Deposited: | 29 Jun 2016 16:09 |
| Last Modified: | 16 Feb 2025 23:51 |
| Projects: | 639744 |
| Funders: | European Research Council |
| URI: | http://eprints.lse.ac.uk/id/eprint/67036 |
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