Please use this identifier to cite or link to this item: http://ktisis.cut.ac.cy/handle/10488/9501
Title: Effects of market default risk on index option risk-neutral moments
Authors: Andreou, Panayiotis 
Keywords: Implied volatility smirk
Market default risk
Market leverage
Risk-neutral moments
Issue Date: 1-Jan-2015
Publisher: Routledge
Source: Quantitative Finance Volume 15, Issue 12, 2 December 2015, Pages 2021-2040
Abstract: We investigate the relative importance of market default risk in explaining the time variation of the S&P 500 Index option-implied risk-neutral moments. The results demonstrate that market default risk is positively (negatively) related to the index risk-neutral volatility and skewness (kurtosis). These relations are robust in the presence of other factors relevant to the dynamics and microstructure nature of the spot and option markets. Overall, this study sheds light on a set of economic determinants which help to understand the daily evolution of the S&P 500 Index option-implied risk-neutral distributions. Our findings offer explanations of why theoretical predictions of option pricing models are not consistent with what is observed in practice and provide support that market default risk is important to asset pricing.
URI: http://ktisis.cut.ac.cy/handle/10488/9501
ISSN: 14697688
Rights: © 2015 Taylor & Francis.
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