A1201
Title: Market returns dormant in options panels
Authors: Yoosoon Chang - Indiana University (United States) [presenting]
Soohun Kim - KAIST (Korea, South)
Joon Park - Indiana University (United States)
Youngmin Choi - Baruch College (United States)
Abstract: The purpose is to uncover the relationship between extensive option panels and market returns through functional predictive regression. Employing the approach on the realized returns of the S\&P 500, remarkable performance is achieved in predicting S\&P 500 monthly returns, yielding an in-sample R-squared of 5.12\% and an out-of-sample R-squared of 4.88\%. Additionally, the method proves highly effective in predicting the realized variance of the S\&P 500 index, achieving in-sample and out-of-sample R-squared values of 33.65\% and 23.35\%. The predictive accuracy of the model surpasses that of established predictors and equilibrium modes. It is found that utilizing the risk-neutral density as a predictor and employing the functional regression approach is indispensable for achieving this level of outperformance.
