Firm Fundamentals and Variance Risk Premiums

Matthew Robert Lyle, James Patrick Naughton

Research output: Working paper

Abstract

We develop a tractable valuation model which shows that future asset returns are predictably related to two firm characteristics, book-to-market (bm) and return on equity (roe), because these measures carry information about priced risk. The model we derive predicts a negative relation between expected variance returns embedded in option prices (variance risk premiums) and both bm and roe. We confirm this prediction using a variety of empirical specifications. Our results show that accounting-based characteristics simultaneously inform investors about cash flows as well as the priced risk of those cash flows.
Original languageEnglish (US)
PublisherSocial Science Research Network (SSRN)
Number of pages55
StatePublished - Jan 18 2016

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    Lyle, M. R., & Naughton, J. P. (2016). Firm Fundamentals and Variance Risk Premiums. Social Science Research Network (SSRN). http://ssrn.com/abstract=2696183