The Pricing of Short-Term market Risk: Evidence from Weekly Options
Torben Andersen (),
Nicola Fusari and
No 21491, NBER Working Papers from National Bureau of Economic Research, Inc
We study short-term market risks implied by weekly S&P 500 index options. The introduction of weekly options has dramatically shifted the maturity profile of traded options over the last five years, with a substantial proportion now having expiry within one week. Economically, this reflects a desire among investors for actively managing their exposure to very short-term risks. Such short-dated options provide an easy and direct way to study market volatility and jump risks. Unlike longer-dated options, they are largely insensitive to the risk of intertemporal shifts in the economic environment, i.e., changes in the investment opportunity set. Adopting a novel general semi-nonparametric approach, we uncover variation in the shape of the negative market jump tail risk which is not spanned by market volatility. Incidents of such tail shape shifts coincide with serious mispricing of standard parametric models for longer-dated options. As such, our approach allows for easy identification of periods of heightened concerns about negative tail events on the market that are not always "signaled" by the level of market volatility and elude standard asset pricing models.
JEL-codes: C01 C14 C52 C58 G12 G13 G17 G32 (search for similar items in EconPapers)
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Published as ANDERSEN, T. G., FUSARI, N. and TODOROV, V. (2017), Short‐Term Market Risks Implied by Weekly Options. The Journal of Finance, 72: 1335-1386. doi:10.1111/jofi.12486
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