The Equity Risk Premium: An Options-based Approach

Product Description

This book is a research monograph that presents the author’s take on the problem of the equity risk premium (ERP). His novel approach constructs forward-looking estimates from the timely information available in the options markets. Topics include how to form ERP estimates for broad-based equity indices (such as the S&P 500 Index) and single-name equities (individual common stocks). The result is an Options-based Asset Pricing theory (OBAP) which provides an objective and fully forward-looking alternative to the well-known CAPM and other approaches.The book should interest: investors and traders with a college-level course in probability or “statistics with calculus”, the quantitative finance community, and anyone interested in asset pricing.Provided: approximately 480 pages of original research in 21 chapters -- with over 100 illustrations and some Python codes. In addition, the reader is guided to some supplementary “dashboard-style” apps which further illustrate the results and methods.Chapters: 1: Summary of Results and Chapter Guide 2: Probability: the Casino, the Weather, and the Stock Market 3: The Economics of Risk: Utility Theory 4: The Long-run ERP 5: Exponential Tilt and the Equity-based iid Estimator 6: Stock Option Fundamentals 7: Exponential Tilt and Risk-Neutral Probabilities 8: My 11-year Study – and an ERP app 9: ERP Time Series 10: ERP during the COVID-19 Pandemic 11: ERP via Payoff Replication: VIX Methodology 12: Do ERP’s Predict Subsequent Market Returns? 13: OBAP: Single-name ERP’s 14: Assessing the Probability Forecasts: a Maximum Likelihood Approach 15: γ in a Balanced Market 16: Utility Aggregation, Kelly, and Dumas 17: The ERP Apps: Or, My Dinner with MS Copilot 18: Exponential Tilt and GARCH Structure 19: Notes on the Capital Asset Pricing Model 20: Linear Factor Models and Their Discontents 21: Is There a Separate Volatility Risk Aversion?