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Short‐Term Market Risks Implied by Weekly Options
Author(s) -
ANDERSEN TORBEN G.,
FUSARI NICOLA,
TODOROV VIKTOR
Publication year - 2017
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12486
Subject(s) - volatility (finance) , economics , implied volatility , equity (law) , jump , volatility smile , financial economics , econometrics , volatility risk premium , valuation of options , variance swap , stochastic volatility , actuarial science , physics , quantum mechanics , political science , law
We study short‐maturity (“weekly”) S&P 500 index options, which provide a direct way to analyze volatility and jump risks. Unlike longer‐dated options, they are largely insensitive to the risk of intertemporal shifts in the economic environment. Adopting a novel seminonparametric approach, we uncover variation in the negative jump tail risk, which is not spanned by market volatility and helps predict future equity returns. As such, our approach allows for easy identification of periods of heightened concerns about negative tail events that are not always “signaled” by the level of market volatility and elude standard asset pricing models.