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Cross-Sectional Variation of Risk-targeting Option Portfolios

Liuren Wu & Yaofei Xu

Review of Asset Pricing Studies2025https://doi.org/10.1093/rapstu/raaf012article
AJG 3ABDC A*
Weight
0.50

Abstract

Options contracts are listed on thousands of stocks with different numbers of contracts per stock. This paper proposes to construct four risk-targeting portfolios to consolidate information in all the option contracts on each stock. A cross-sectional regression identifies the market price of risk on each risk source for each stock at any given date. The market price of risk estimate strongly predicts the excess return of the corresponding risk-targeting portfolio. Long-short portfolio construction on the risk-targeting portfolios in proportion to the market price of risk estimates generates highly positive average excess returns per unit risk across all four risk dimensions.

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https://doi.org/https://doi.org/10.1093/rapstu/raaf012

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@article{liuren2025,
  title        = {{Cross-Sectional Variation of Risk-targeting Option Portfolios}},
  author       = {Liuren Wu & Yaofei Xu},
  journal      = {Review of Asset Pricing Studies},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1093/rapstu/raaf012},
}

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Cross-Sectional Variation of Risk-targeting Option Portfolios

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Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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