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The Pricing of Short-Term market Risk: Evidence from Weekly Options

Author

Listed:
  • Torben G. Andersen
  • Nicola Fusari
  • Viktor Todorov

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. Economically, this reflects a desire among investors for actively managing their exposure to very short-term risks. Such short-dated options provide an easy and direct way to study market volatility and jump risks. Unlike longer-dated options, they are largely insensitive to the risk of intertemporal shifts in the economic environment, i.e., changes in the investment opportunity set. Adopting a novel general semi-nonparametric approach, we uncover variation in the shape of the negative market jump tail risk which is not spanned by market volatility. Incidents of such tail shape shifts coincide with serious 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 on the market 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, 2015. "The Pricing of Short-Term market Risk: Evidence from Weekly Options," NBER Working Papers 21491, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:21491
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    References listed on IDEAS

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    Cited by:

    1. José E. Figueroa-López & Sveinn Ólafsson, 2016. "Short-term asymptotics for the implied volatility skew under a stochastic volatility model with Lévy jumps," Finance and Stochastics, Springer, vol. 20(4), pages 973-1020, October.
    2. Ging‐Ginq Pan & Yung‐Ming Shiu & Tu‐Cheng Wu, 2018. "Analysis of the clientele effect and the information content of short‐term index option returns in Taiwan," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(6), pages 715-730, June.

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    More about this item

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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