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Disasters Implied by Equity Index Options

Listed author(s):
  • David Backus
  • Mikhail Chernov
  • Ian Martin

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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File URL: http://pages.stern.nyu.edu/~dbackus/GE_asset_pricing/disasters/BCM_disasters_latest.pdf
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Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 09-14.

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Date of creation: 2009
Handle: RePEc:ste:nystbu:09-14
Contact details of provider: Postal:
New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126

Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/

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