The Forecasting Power of Short-Term Options

We propose robust option-implied measures of conditional volatility, skewness, and kurtosis based on quantiles and expectiles inferred from weekly options on the S&P 500. All quantities are, by construction, forward-looking and estimated non-parametrically through a novel robust and arbitrage-free natural smoothing spline technique that produces quick-to-estimate volatility smiles. We find that some option-implied robust indicators exhibit short–, medium–, and long-term predictive ability for the US equity risk premium and higher moments, both in and out of sample, which outperform equal indicators inferred from historical returns.