Associate Professor Xianming Sun, Executive Deputy Director of the Base, participated in the collaborative paper titled "Option-implied Ambiguity and Equity Return Predictability", which was published online in the internationally renowned journal Journal of Futures Markets. The co-authors of the paper include Professor Yanchu Liu (Sun Yat-sen University), Dr. Chen Liu (Sun Yat-sen University), and Dr. Yiyao Chen (Central University of Finance and Economics). The Journal of Futures Markets primarily explores the latest findings in financial futures and derivatives, covering areas such as futures, derivatives, risk management and control, financial engineering, new financial instruments, and hedging strategies.

Abstract：We propose a model-guided option-implied ambiguity measure to capture uncertainty regarding the return distribution of a risky asset underlying a set of options, and investigate its predictive power on the asset return. A representative investor's ambiguous beliefs or prior distributions on the underlying asset returns are extracted from the market prices of options, the expected volatility of which is then defined as the option-implied ambiguity and is calculated in line with Brenner and Izhakian. Simulated paths of the calibrated models are utilized to compute all pertinent probability characteristics from a forward-looking perspective. The empirical results with SSE 50 ETF options indicate that the proposed option-implied ambiguity has strong predictive power for future returns of SSE 50 ETF. Out-of-sample tests also verify the significant predictive ability of the option-implied ambiguity to the equity returns.

Keywords：ambiguity; derivatives; option‐implied information; return predictability

Link：https://onlinelibrary.wiley.com/doi/10.1002/fut.22530

Author profile

Xianming Sun is an associate professor in the Department of Financial Engineering at Zhongnan University of Economics and Law and the Executive Deputy Director of the Innovation and Talent Base for Digital Technology and Finance. His research focuses on financial engineering, financial technology, and related fields. His research outcomes have been published in journals such as Journal of Economic Dynamics and Control, Journal of Futures Markets, Energy Economics, and Journal of Computational and Applied Mathematics. He has been awarded the title of "Wenlan Young Scholar" by Zhongnan University of Economics and Law. He has presided over two projects funded by the National Natural Science Foundation of China and research projects funded by the Fundamental Research Funds for the Central Universities. His related research was awarded the Outstanding Paper Prize at the 16th China Financial Engineering Annual Conference (2017).