Greeks-Neutral Option Excess Returns

This study investigates the linkage between ex-ante expected greeks-neutral excess return ((Formula presented.)) and ex-post realized greeks-neutral excess return ((Formula presented.)). Employing the top-down framework, we show that (Formula presented.) is determined by the difference between the market-derived implied volatility and the estimated implied volatility absent arbitrage opportunities. Serving (Formula presented.) as the optimal predictor of (Formula presented.), we first find that (Formula presented.) positively predicts (Formula presented.). Second, the bottom-up (Formula presented.) complements the top-down (Formula presented.), enhancing the prediction of (Formula presented.). Third, the 10-1 portfolios formed on (Formula presented.) realize positive excess returns and sizeable Sharpe ratios in the future. The IPCA that employs information from different measures and terms generates superior performance.