Publication details for Professor Panayiotis AndreouAndreou, P. (2015). Effects of market default risk on index option risk-neutral moments. Quantitative Finance 15(12): 2021-2040.
- Publication type: Journal Article
- ISSN/ISBN: 1469-7688, 1469-7696
- DOI: 10.1080/14697688.2014.1000367
- Keywords: Market default risk, Implied volatility smirk, Risk-neutral moments, Market leverage, G12, G13, G14.
- Further publication details on publisher web site
- Durham Research Online (DRO) - may include full text
Author(s) from Durham
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.