Toward an early warning system of financial crises: What can index futures and options tell us?

Wei-Xuan Li, Clara Chia-Sheng Chen and Joseph French

The Quarterly Review of Economics and Finance, 2015, vol. 55, issue C, 87-99

Abstract: This research develops an early warning system (EWS) for equity market crises based on multinomial logit models and variables relating to the information content of index futures and option markets. We show that the information impounded in S&P 500 futures and options is useful as leading indicators of financial crises. Results reveal that models estimated with futures and put options significantly improve the medium-term predictability of equity market crises. Variables that consistently provided information of an impending crisis include: the VIX, open interest, dollar volume, put option price, put option effective spread, and the Treasury term spread.

Keywords: Financial crises; S&P 500 options and futures; Early warning system (EWS); Multinomial logit models (search for similar items in EconPapers)
JEL-codes: G01 G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:55:y:2015:i:c:p:87-99

DOI: 10.1016/j.qref.2014.07.004

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