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Risk-Neutral Densities and Catastrophe Events

In: Derivative Securities Pricing and Modelling

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  • Michael Herold
  • Matthias Muck

Abstract

In this research, we analyze the impact of catastrophe events on risk-neutral densities which can be implied from European option markets. As catastrophe events we consider the destruction of the nuclear power plant at Fukushima and the downgrading of U.S. sovereign debt in 2011. In an event study, we analyze the impact on European blue chip index options traded at EUREX. We find that after a short adaption period, probability mass of especially risk-neutral density functions derived from long-term options is shifted toward the right side. Thus, very good states of the economy become more expensive indicating higher prices for deep out-of-the-money options. This signifies that there has been speculation on a recovery of the German stock market after the shocks.

Suggested Citation

  • Michael Herold & Matthias Muck, 2012. "Risk-Neutral Densities and Catastrophe Events," Contemporary Studies in Economic and Financial Analysis, in: Derivative Securities Pricing and Modelling, pages 185-207, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:csefzz:s1569-3759(2012)0000094010
    DOI: 10.1108/S1569-3759(2012)0000094010
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    Keywords

    Risk-neutral densities; derivatives;

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