The 2013 winners of the AIMA Canada Research Award are: Peter Christoffersen of the Rotman School of Management, University of Toronto; and Xuhui (Nick) Pan of the Freeman School of Business, Tulane University. They won for their paper entitled “Equity Portfolio Management Using Option Price Information.”
Christoffersen and Pan will share a cash prize of $10,000 for their winning submission.
In their winning submission, the authors note, “it has long been recognized that options provide excellent forecasts of future volatility on underlying assets.” They observe that recent academic research suggests: (1) that option-implied volatility estimates from index options can help predict future returns in the market; (2) that option-implied oil volatility can help forecast the overall stock market; and (3) that option prices contain information that is useful for equity portfolio allocation.
To test these assumptions, the authors surveyed three recent articles on cross-sectional equity pricing that incorporate option-implied information. All three showed that stocks with exposure to certain option-implied characteristics tend to perform better than other stocks on average over time.
On the basis of their study, the authors conclude that equity managers can earn positive alpha:
- by using information in individual equity options;
- by using stocks’ exposure to information in market index options, and
- by using stocks’ exposure to crude oil option information.
They also conclude that option-implied information can also help construct better mean-variance portfolios and better estimates of market beta.