Downside jump risk and the levels of futures-cash basis

Chin-Ho Chen

Pacific-Basin Finance Journal, 2019, vol. 57, issue C

Abstract: This study investigates the effect of downward market jump risk on the futures-cash basis in the Taiwan stock index futures market. Using the slope of the option implied volatility smirk as a proxy for the risk of large downward price moves, we find that market jump risk helps explain variations in basis. Increased downward jump risk decreases the basis. Indeed, the basis driven by downward jump risk is widened with decreasing time to expiration. After separating downward jump risk into unexpected and expected jump risks, we find that unexpected downward jump risk affects the basis, while no convincing evidence supports the expected downward jump risk effect. The downside jump risk effect is robust even when using the implied volatility skew and the return of a constructed jump risk-mimicking portfolio as proxies for downward jump risk and excluding the sample period from the 2008 financial crisis.

Keywords: Downside jump risk; Futures basis; Implied volatility smirk (search for similar items in EconPapers)
JEL-codes: G10 G11 G14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927538X19300745
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x19300745

DOI: 10.1016/j.pacfin.2019.101200

Access Statistics for this article

Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

More articles in Pacific-Basin Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().