Professor Ohad Kadan, Olin Business School, Washington University
We present a sufficient condition under which the prices of options with different strike prices written on a particular stock can be used to calculate a lower bound on the expected returns of that stock. The sufficient condition imposes a restriction on a combination of the stock’s systematic and idiosyncratic risk. The lower bound is forward-looking and can be calculated on a high-frequency basis for stocks with liquid option trading. We estimate the lower bound empirically for constituents of the S&P 500 index and study its cross-sectional properties. We find that the bound increases with beta and decreases with size. The bound also provides an economically meaningful signal on future realised stock returns.
Ohad Kadan is a Professor of Finance and the chair of the finance area at Washington University’s Olin Business School, where he has been a faculty member since 2002. His research revolves around different aspects of information, risk, liquidity, and incentives in financial markets. Kadan’s research papers have been published in leading journals in finance, accounting, and economics and have won a number of prestigious awards. In his recent work Kadan studies how liquidity in financial markets is affected by changes in market structure and how liquidity is related to asset prices over time. He also studies how different aspects of risk such as high distribution moments and rare disasters are related to performance evaluation and to the pricing of financial assets. Kadan holds a PhD in finance from the Hebrew University of Jerusalem.