Year: 2011
Type: article
Abstract: ABSTRACT We use equity index options to quantify the distribution of consumption growth disasters. The challenge lies in connecting the risk‐neutral distribution of equity returns implied by options to the true distribution of consumption growth. First, we compare pricing kernels constructed from macro‐finance and option‐pricing models. Second, we compare option prices derived from a macro‐finance model to those we observe. Third, we compare the distribution of consumption growth derived from option prices using a macro‐finance model to estimates based on macroeconomic data. All three perspectives suggest that options imply smaller probabilities of extreme outcomes than have been estimated from macroeconomic data.
Source: The Journal of Finance
Authors: DAVID BACKUS, MIKHAIL CHERNOV, IAN MARTIN
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2137363648