The Conditional Expected Market Return
108 Pages Posted: 11 Sep 2017 Last revised: 13 Oct 2020
Date Written: November 18, 2019
We derive lower and upper bounds on the conditional expected excess market return that are related to risk-neutral volatility, skewness, and kurtosis indexes. The bounds can be calculated in real time using a cross section of option prices. The bounds require a no-arbitrage assumption, but do not depend on distributional assumptions about market returns or past observations. The bounds are highly volatile, positively skewed, and fat tailed. They imply that the term structure of expected excess holding period returns is decreasing during turbulent times and increasing during normal times, and that the expected excess market return is on average 5.2%.
Keywords: Equity Risk Premium, Risk Neutral Moments, Preferences
JEL Classification: E44, G1
Suggested Citation: Suggested Citation