On Estimating The Implied Beta Using Option Information

As the component of the capital asset pricing model(CAPM), beta is an important indicator of systemic risk, which has important implications for predicting the yield, asset pricing, evaluating the performance of assets and so on. The traditional estimation methods for beta are mostly based on historical data, which need to assume that beta is stable. However, the study find that beta is time-varying, when the company’s operating environment and capital structure changes, Beta generally will also change.From the BKM model (2003), by using information extracted from options to estimate the higher moments, we build the implied beta and study the effect of implied beta forecasts and economic significance. Specifically, we use BKM model to extract the second moment, third moment under the risk-neutral measure. Combined with the single-factor model, we build the implied beta. By testing through the statistical and economical test, we compare the different methods, study the ability to predict and economic sence of implied beta.This paper uses the TXO, TEO and TFO to find that:(1) The implied skewness of Taiwan index, electronic index and finance index are significantly negative, but the implied skewness of electronic index and finance index are more violent, which may be affected by the developments in Taiwan options market. The trading volume of electronic index options and financial index options are much smaller than Taiwan index, which will undoubtedly have an impact on changes in the option price, resulting in greater volatility of implied skewness.(2) Based on a single factor model and BKM model, the implied beta exhibits relatively large volatility, which is related to the implied skewness.(3)Through statistical tests, we find that implied beta has explanatory power, but the effect is not as well as that of the U. S. market. We can improve the explanatory power by combining the implied beta and historical beta.(4) By the economic test, indicate that implied Beta has economic sense. When the economy recovers, implied Beta is prone to be less than historical beta, so that the hedge ratio is small and gets the economic gain; while in the period of economic downturn, the implied beta is prone to be greater than historical beta, so that the hedge ratio is greater and we can prevent the risk from further economic downturn. Implied beta performs better than historical beta in terms of capturing market trend, which is important for building a portfolio of assets and hedging risk.(5)Through a series of tests, we find that, although FGK model is rough, it also has some applicability in the Taiwan market.