The Information Content of Option-Implied Tail Risk on the Future Returns of the Underlying Asset

Journal of Futures Markets, Forthcoming

46 Pages Posted: 31 May 2017 Last revised: 9 Dec 2017

See all articles by Yaw-Huei Wang

Yaw-Huei Wang

National Taiwan University; UNSW

Kuang-Chieh Yen

Soochow University, Taiwan

Date Written: September 16, 2017

Abstract

We compile option-implied tail loss and gain measures based on a deep out-of-the- money option pricing formula derived by applying ‘extreme value theory’, and then use these measures to investigate the information content of option-implied tail risk on the future returns of the underlying assets. Our empirical analysis shows that both tail measures implied by S&P 500 and VIX options can predict future changes in the corresponding underlying assets and are informative on the future returns of the S&P 500 index. The relationships are particularly strong during periods of economic recession and driven by the tail-risk premium.

Keywords: Tail measures, S&P 500, VIX, Options, Extreme value theory.

JEL Classification: G13, G14

Suggested Citation

Wang, Yaw-Huei and Yen, Kuang-Chieh, The Information Content of Option-Implied Tail Risk on the Future Returns of the Underlying Asset (September 16, 2017). Journal of Futures Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2977988 or http://dx.doi.org/10.2139/ssrn.2977988

Yaw-Huei Wang (Contact Author)

National Taiwan University ( email )

Department and Graduate Institute of Finance
College of Management
Taipei, 106
Taiwan
+886233661092 (Phone)
+886283695581 (Fax)

UNSW ( email )

Sydney, NSW 2052
Australia

Kuang-Chieh Yen

Soochow University, Taiwan ( email )

56. kuei-yang St., Sec. 1
Taipei, Taiwan 10048
Taiwan

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