Essays on Asset Pricing Using Option-Implied Information

Abstract

The forward-looking nature of the options market makes it an ideal environment for investigating the determinants and the information content of investors' expectations
about the future. Therefore, this thesis explores the interrelations arising between the macroeconomic and stock market environment, and the S&P 500 index options
market.

First, we examine how investors' sentiment driven by macroeconomic fundamentals and investors' erroneous beliefs impact the risk-neutral skewness. Our findings
reveal that the macroeconomic fundamentals component of investor sentiment is the main driving force of risk neutral skewness throughout the whole sample period, while the error in investors' beliefs has limited explanatory power and only during the earlier years examined. Moreover, we show that the fundamentals component of investor sentiment affects differently the prices of call and put options. Second, we extend the concept of risk-neutral skewness by creating measures of forward skewness and gauge their predictive ability for a wide range of macroeconomic variables, asset prices, as well as systemic risk, crash risk, and uncertainty variables. Overall, we document that forward skewness encapsulates important information about future macroeconomic and financial market conditions for horizons up to one year ahead over and above forward variance. Third, we propose a novel measure of dispersion in expectations that is derived from the dispersion of options' trading volume across strike prices. We show that dispersion consistently forecasts negative excess market returns, for horizons up to two years ahead, exhibiting a predictive ability comparable to that of the variance risk premium and outperforming all other variables considered.

This thesis contributes to the asset pricing and macro-finance literature by unravelling the determinants of the pricing kernel, showing that the call and put options markets are segmented and revealing that option prices and trading volume have significant forecasting ability for many aspects of the macroeconomic and financial environment. In that respect our findings are of particular interest not only to academics but also to investors and policy makers.