Research seminar in Finance by Mikhail Chernov: «Disasters implied by equity index options»

Thursday, April 15 International College of Economics and Financel held the Research seminar in Finance.

Lecturer: Mikhail Chernov (London Business School)
Theme: «Disasters implied by equity index options» (pdf version)

 

 

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.

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