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Short-Term Market Risks Implied by Weekly Options

Author

Listed:
  • Torben G. Andersen

    (Northwestern University and CREATES)

  • Nicola Fusari

    (The Johns Hopkins University Carey Business School)

  • Viktor Todorov

    (Northwestern University)

Abstract
We study short-term market risks implied by weekly S&P 500 index options. The introduction of weekly options has dramatically shifted the maturity profile of traded options over the last five years, with a substantial proportion now having expiry within one week. Such short-dated options provide a direct way to study 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 semi-nonparametric approach, we uncover variation in the negative jump tail risk which is not spanned by market volatility and helps predict future equity returns. Incidents of tail shape shifts coincide with mispricing of standard parametric models for longer-dated options. 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.

Suggested Citation

  • Torben G. Andersen & Nicola Fusari & Viktor Todorov, 2018. "Short-Term Market Risks Implied by Weekly Options," CREATES Research Papers 2018-08, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2018-08
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    File URL: https://repec.econ.au.dk/repec/creates/rp/18/rp18_08.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Options; Jumps; Stochastic Volatility; Extreme Events; Time-Varying Tail Risk; Return Predictability;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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