Leiss, Matthias and Nax, Heinrich H. (2015) Option-implied objective measures of market risk. . Eidgenössische Technische Hochschule Zürich, Zurich, Switzerland.
|
PDF
Download (589kB) | Preview |
Abstract
Foster and Hart (2009) introduce an objective measure of the riskiness of an asset that implies a bound on how much of one’s wealth is ‘safe’ to invest in the asset while (a.s.) guaranteeing no-bankruptcy in the long run. In this study, we translate the Foster-Hart measure from static and abstract gambles to dynamic and applied finance using nonparametric estimation of risk-neutral densities from S&P 500 call and put option prices covering 2003 to 2013. This exercise results in an option-implied market view of objective riskiness. The dynamics of the resulting ‘option-implied Foster-Hart bound’ are analyzed and assessed in light of well-known risk measures including value at risk, expected shortfall and risk-neutral volatility. The new measure is shown to be a significant predictor of ahead-return downturns. Furthermore, it is able to grasp more characteristics of the risk-neutral probability distributions than other measures, furthermore exhibiting predictive consistency. The robustness of the risk-neutral density estimation method is analyzed via a bootstrap.
| Item Type: | Monograph (Working Paper) |
|---|---|
| Official URL: | https://www.gess.ethz.ch/en/ |
| Additional Information: | © 2015 The Authors |
| Divisions: | CPNSS |
| Subjects: | H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management H Social Sciences > HG Finance Q Science > QA Mathematics |
| JEL classification: | D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations; Speculations G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure |
| Date Deposited: | 22 Feb 2016 11:37 |
| Last Modified: | 11 Dec 2024 19:20 |
| URI: | http://eprints.lse.ac.uk/id/eprint/65446 |
Actions (login required)
 |
View Item |
Download Statistics
Download Statistics