Option-implied information and predictability of extreme returns : [Version 28 Januar 2013]

  • We study whether prices of traded options contain information about future extreme market events. Our option-implied conditional expectation of market loss due to tail events, or tail loss measure, predicts future market returns, magnitude, and probability of the market crashes, beyond and above other option-implied variables. Stock-specific tail loss measure predicts individual expected returns and magnitude of realized stock-specific crashes in the cross-section of stocks. An investor that cares about the left tail of her wealth distribution benefits from using the tail loss measure as an information variable to construct managed portfolios of a risk-free asset and market index.

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Author:Grigory Vilkov, Yan Xiao
Parent Title (German):SAFE working paper series ; No. 5
Series (Serial Number):SAFE working paper (5)
Publisher:Goethe-Univ., House of Finance, Sustainable Architecture for Finance in Europe, SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2013
Year of first Publication:2013
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2013/04/18
Tag:extreme value theory; implied correlation; option-implied distribution; portfolio optimization; predictability; tail measure; variance risk premium
Issue:Version 28 Januar 2013
Page Number:40
Last Page:36
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht