Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/88713
Authors: 
Vilkovz, Grigory
Xiaox, Yan
Year of Publication: 
2013
Series/Report no.: 
SAFE Working Paper Series 5
Abstract: 
We study whether prices of traded options contain information about future extreme market events. Our option-implied conditional expectation of market loss due to tail events, or tail loss measure, predicts future market returns, magnitude, and probability of the market crashes, beyond and above other option-implied variables. Stock-specific tail loss measure predicts individual expected returns and magnitude of realized stock-specific crashes in the cross-section of stocks. An investor that cares about the left tail of her wealth distribution benefits from using the tail loss measure as an information variable to construct managed portfolios of a risk-free asset and market index.
Subjects: 
extreme value theory
tail measure
implied correlation
variance risk premium
option-implied distribution
predictability
portfolio optimization
JEL: 
G11
G12
G13
G17
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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