Disasters implied by equity index options

David Backus, Mikhail Chernov and Ian Martin

No 15240, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use prices of equity index options to quantify the impact of extreme events on asset returns. We define extreme events as departures from normality of the log of the pricing kernel and summarize their impact with high-order cumulants: skewness, kurtosis, and so on. We show that high-order cumulants are quantitatively important in both representative-agent models with disasters and in a statistical pricing model estimated from equity index options. Option prices thus provide independent confirmation of the impact of extreme events on asset returns, but they imply a more modest distribution of them.

JEL-codes: E44 G12 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-bec and nep-mac
Note: AP EFG
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Citations: View citations in EconPapers (19)

Published as David Backus & Mikhail Chernov & Ian Martin, 2011. "Disasters Implied by Equity Index Options," Journal of Finance, American Finance Association, vol. 66(6), pages 1969-2012, December.

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Related works:
Journal Article: Disasters Implied by Equity Index Options (2011)
Working Paper: Disasters implied by equity index options (2009)
Working Paper: Disasters Implied by Equity Index Options (2009)
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