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
Date Written: September 16, 2017
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: Suggested Citation