We investigate the uncertainty dynamics surrounding extreme weather events through the lens of option and stock markets by identifying market responses to the uncertainty regarding both potential hurricane landfall and subsequent economic impact. Stock options on firms with establishments...

This paper proposes a tail risk index, TIX, as the growth rate of the model-free cumulant generating function of market risk calculated from index option prices. It captures the power law decay rate of the left tail of future return distributions, and thus reflects market beliefs about the...

The financial crisis has raised concerns throughout the industry on the possibility that hedging credit valuation adjustment (CVA) might become increasingly difficult should the long-standing correlation between singlename and index CDS products break down. So, we provide an estimation of the...

Interest rate variance risk premium (IRVRP), the difference between implied and realized variances of interest rates, emerges as a strong predictor of Treasury bond returns of maturities ranging between one and ten years for return horizons up to six months. IRVRP is not subsumed by other...

This paper uses an exclusive proprietary data set of European Credit Derivatives and VIX markets, covering a sample of 5 to 7 years, to study the nature of the link between credit risk and market risk, widely acknowledged in the academic literature. This allows us to establish cointegration in...

Under Black-Scholes (BS) assumptions, empirical volatility and risk neutral volatility are given by a single parameter, which captures all aspects of risk. Inverting the model to extract implied volatility from an option's market price gives the market's forecast of future empirical volatility....

This article investigates the pricing of volatility risk in agricultural commodity markets. We show theoretically that the cost of bearing volatility risk can be measured using returns to delta-neutral straddles. Using a sample of options for five commodities (corn, soybeans, Chicago wheat, live...

We offer evidence that the tendency of high real-investment stocks to underperform others is driven by firms physically constructing new capacity. The conditioning ability of construction work does not come from differences in investment intensity, financing sources, or profitability. Yet, it...

This paper presents predictability evidence of the implied-expected variance difference, or variance risk premium, for financial market risk premia: (1) the variance difference measure predicts a positive risk premium across equity, bond, currency, and credit markets; (2) such a short-run...

We derive the total variance risk premium for an index in the stochastic environment of Driessen, Maenhout and Vilkov (2009) and correct the previous authors omission of certain components which contribute significantly to index option expected returns. This study provides a mathematically...