Time-varying Crash Risk Embedded in Index Options: The Role of Stock Market Liquidity

Peter Christoffersen, Bruno Feunoua, Yoontae Jeon, Chayawat Ornthanalai

Publikation: Working paperForskning

Abstract

We estimate a continuous-time model with dynamic crash probability using the S&P500 index options and high-frequency information. We find that market illiquidity is an important factor in explaining the time-varying stock market crash risk embedded in index options. While market illiquidity and return volatility play complementary roles in explaining the time-varying crash risk, the relative contribution of the volatility factor is weakened once we include market illiquidity as an economic variable. Examining the link between market illiquidity and option-implied crash risk, we find that the availability of arbitrage capital and adverse selection facing liquidity providers are economic driving forces.
OriginalsprogEngelsk
UdgivelsesstedToronto
UdgiverRotman School of Management, University of Toronto
Antal sider15
DOI
StatusUdgivet - 24 jul. 2018
NavnRotman School of Management Working Paper
Nummer2797308

Emneord

  • Market liquidity
  • Crash risk
  • Jump intensity
  • Options
  • Filtering

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