A. Book and C. Sala: The Forecasting Power of Short-term Options

June 15, 2020

We propose option-implied measures of conditional asymmetry based upon quantiles and expectiles inferred from weekly options. All quantities are by construction forward looking and estimated non-parametrically through a novel arbitrage-free natural smoothing spline technique that produces quick to estimate volatility smiles. We find that option implied asymmetry indicators exhibit short, medium and long-term predictive ability for the U.S. equity risk premium and market volatility, both in- and out-of-sample, and outperform equal indicators inferred from historical returns.