Forecasting Stock Returns Using Option-Implied State Prices*
Why this work is in the frame
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Bibliographic record
Abstract
Options prices embed the risk preferences that determine expected returns in asset pricing models. Therefore, functions of options prices should predict returns. In this paper, we show that the State Prices of Conditional Quantiles (SPOCQ)—functions of options prices introduced in Metaxoglou and Smith (2016)—exhibit strong predictive ability for the U.S. equity premium. These SPOCQ series provide estimates of the market’s willingness to pay for insurance against outcomes in various quantiles of the return distribution. They also relate to expected returns in prominent asset pricing models. Our SPOCQ series that captures relative risk aversion exhibits strong predictive ability for S&P 500 returns at horizons between 6 and 18 months, both in the full sample, 1990–2012, and out of sample. Our SPOCQ series that captures volatility aversion, however, exhibits no predictive ability due to the lack of skewness in the return distribution for the horizons considered.
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Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.002 | 0.003 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.001 | 0.000 |
| Bibliometrics | 0.001 | 0.000 |
| Science and technology studies | 0.001 | 0.000 |
| Scholarly communication | 0.001 | 0.002 |
| Open science | 0.001 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from it