The 2013 winners of the AIMA Canada Research Award are: Peter Christoffersen of the Rotman School of Management, University of Toronto; and Xuhui (Nick) Pan of the Freeman School of Business, Tulane University. They won for their paper entitled “Equity Portfolio Management Using Option Price Information.”

Christoffersen and Pan will share a cash prize of $10,000 for their winning submission.

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In their winning submission, the authors note, “it has long been recognized that options provide excellent forecasts of future volatility on underlying assets.” They observe that recent academic research suggests: (1) that option-implied volatility estimates from index options can help predict future returns in the market; (2) that option-implied oil volatility can help forecast the overall stock market; and (3) that option prices contain information that is useful for equity portfolio allocation.

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To test these assumptions, the authors surveyed three recent articles on cross-sectional equity pricing that incorporate option-implied information. All three showed that stocks with exposure to certain option-implied characteristics tend to perform better than other stocks on average over time.

On the basis of their study, the authors conclude that equity managers can earn positive alpha:

  • by using information in individual equity options;
  • by using stocks’ exposure to information in market index options, and
  • by using stocks’ exposure to crude oil option information.

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They also conclude that option-implied information can also help construct better mean-variance portfolios and better estimates of market beta.