Moment Risk Premium And Market Return Predictability

In order to enrich China’s multi-level capital market product system,the stock exchanges have successively listed several ETF option products in recent years.As a basic risk management tool in the stock market,ETF options have a unique nonlinear structure of profit and loss,which have been favored by individual investors and institutional investors since their listings.At the same time,extracting forward-looking information from financial options has become one of the hot spots in academic research.As the difference of option implied moments and historical expected moments,the moment risk premium reflect the unique part of opinions for professional investors in option trading market except historical information.This part of difference is caused by the fact that the underlying asset cannot reflect all market information in a timely manner,so it will help us predict the future returns.Using the price data of SSE 50 ETF funds and corresponding options from February 2015 to September 2021,this paper constructs the traditional variance risk premium,separates the high-order moment information from traditional measures,and forecasts the future returns respectively.The results show that:(i)compared with the traditional variance risk premium,the fourth-order moment risk premium is a better signal to predict the future returns of the underlying assets.In the short and medium term(2 month to 1 year),it has a significant negative forecasting ability for the future return of the underlying assets.(ii)The robustness test of the forecasting ability of the fourth-order moment risk premium shows that the forecasting ability is not affected whether the control variables related to market conditions are added,the partial least squares regression is used,or other relevant market indexes are predicted.(iii)In real practice,the out-of-sample regression analysis are passed and the timing strategy and selecting strategy based on the fourth-order moment risk premium can obtain higher utility value and economic benefits for the mean-variance investors.