Juan M. Londono, Federal Reserve Board of Governors
Mehrdad Samadi, Federal Reserve Board of Governors
Annette Vissing-Jorgensen, Federal Reserve Board of Governors
Abstract: We develop a methodology to determine which days are "equity premium events": events with significantly elevated equity premia relative to the daily equity term structure. To do so, we use recently available daily S&P 500 option expirations and forward analogs of option-implied ex ante measures of the equity premium. We use a data-driven approach to identify events that are significantly priced without taking a stance on what those events are. A variety of individual events are associated with significantly elevated equity premia. Among macroeconomic releases, FOMC, CPI, and nonfarm payrolls have the largest abnormal equity premia, which increase substantially between June 2022 and June 2023. However, the elevated equity premia on macroeconomic release days account for a significantly smaller share of total expected returns compared to previous estimates using realized excess returns. To provide intuition for the significant variation in equity premia across announcement types and time, we propose an asset pricing framework that decomposes the equity premium for a given macroeconomic release into components due to news variance and the sensitivities of the stock market and the SDF to the news released.
Discussant: David Schreindorfer, Michigan State University
Abstract: We document asset pricing implications of the new zero days-to-expiration (0DTE) options, which today account for half of the total S\&P 500 option volume. We show that: (i) most of the intra-day equity premium is attributable to market returns between -5\% and 0\%; (ii) investors demand a high compensation to bear variance risk over the day, which is mainly due to compensation for upside risk; (iii) the variance risk premium predicts intra-day market returns, with a negative relation that is driven by the upside risk premium; and (iv) 0DTE options violate stochastic dominance restrictions, where exploiting this relative mispricing is highly profitable. Our findings contrast with evidence from longer horizons and are consistent with a nonmonotonic pricing kernel that is especially high for positive market returns.
Xiaoliang Wang, Hong Kong University of Science & Technology
Dongchen Zou, University of Pennsylvania
Abstract: Are there risk factors that are pervasive across major classes of corporate securities:stocks, bonds, and options? We employ a novel econometric procedure thatrelies on asset characteristics to estimate a conditional latent factor model. A commonrisk factor structure prominently emerges across asset classes. Several commonfactors explain a substantial amount of time-series variation of individual asset returnsacross all three asset classes, and have sizable Sharpe ratios. Several of our factorsare highly correlated with some of asset-class-specific factors as well as macroeconomicand financial variables. While a small set of common factors does not fully capturethe cross-section of average returns, imposing the factor structure is useful in practice,especially in out-of-sample analysis. A mean-variance efficient portfolio that utilizesasset characteristics achieves a high Sharpe ratio as different asset classes hedge eachother’s exposures to the common factors.
