Abstract
Motivated by the conflict between capital market theory and empirical results related to the pricing of systematic and nonsystematic risk, we develop, estimate (using option pricing data), and test a measure of ex-ante systematic risk. In our cross-sectional analysis, we find that our measure of implied beta is significant in explaining the future returns for a sample of 2,864 optionable firms examined during the 1999-2010 sample period. Although we fail to find a significant relationship between a traditional measure of systematic risk, beta, and future stock returns, we do provide evidence of a significant positive relationship between future stock returns and our implied beta measure. However, our robustness tests indicate that the implied beta measure is significant only for smaller firms and for firms with higher ratios of book-to-market equity.
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