We create a novel measure of stock market ambiguity that is derived from the dispersion of S&P 500 index options trading volume across strike prices. We show that, for the 1996:01–-2012:12 period, ambiguity consistently forecasts negative market excess returns for horizons up to two years ahead, exhibiting a predictive ability comparable to that of the variance risk premium (VRP) and outperforming all other traditional predictors considered both in-sample and out-of-sample. Moreover, trading strategies that are based on the out-of-sample forecasting power of stock market ambiguity at both the aggregate and the portfolio level provide a mean-variance investor with significant utility gains compared to a buy-hold strategy. We fi…nd that the information embedded in stock market ambiguity is not subsumed by other option-implied measures that proxy for variance and jump risk, or re‡flect investors' ’hedging demand. Our results are in line with equilibrium models that incorporate Bayesian learning and an elasticity of intertemporal substitution lower than one.
When I get home I will probably download the paper and see whether I can make sense of it but was curious if anybody here was already aware of this or had looked at anything similair.
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