Expected market risk premiums in the international cross-section

This paper provides the first systematic international examination of option-implied lower bounds on the expected market risk premium (EMRP). Using the Chabi-Yo and Loudis (2020) bound as our primary measure, we apply the Back et al. (2022) validity and tightness tests to 15 international stock markets and find that the bound is both valid and tight at the one-month horizon in 12 of these markets, supporting its use as an unbiased proxy for expected returns. Using these validated forward-looking measures, we revisit the international asset pricing literature and show that exposure to global market, regional market, and global financial cycle risk are priced, while exposure to dollar risk, carry risk, and the non-market factors in the Fama and French (2017) global five-factor model are not. Notably, several of these relationships cannot be identified using realised returns over the same sample period, illustrating the value of direct measures of expected returns in asset pricing tests. Finally, we show that option-implied EMRPs significantly predict the cross-section of realised international stock market returns. Our results are robust to using the alternative lower bound of Martin (2017) .