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The information content of option‐implied tail risk on the future returns of the underlying asset
Author(s) -
Wang YawHuei,
Yen KuangChieh
Publication year - 2018
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21887
Subject(s) - economics , tail risk , recession , asset (computer security) , index (typography) , econometrics , risk premium , valuation of options , financial economics , actuarial science , computer science , computer security , world wide web , keynesian economics
We compile option‐implied tail loss and gain measures based on a deep out‐of‐the‐money option pricing formula derived by applying “extreme value theory,” and then use these measures to investigate the information content of option‐implied tail risk on the future returns of the underlying assets. Our empirical analysis shows that both tail measures implied by S&P 500 and VIX options can predict future changes in the corresponding underlying assets and are informative on the future returns of the S&P 500 index. The relationships are particularly strong during periods of economic recession and driven by the tail‐risk premium.