International crash risk premium Chen, Steven Shu-Hsiu
Journal of international financial markets, institutions & money,
July 2024, 2024-07-00, Volume:
94
Journal Article
Peer reviewed
This paper investigates the international crash risk and the cross-section of stock index returns. We use the ex-ante model-free negative skewness measured by country-specific index options, proposed ...in Bakshi et al. (2003), as a proxy of the crash risk. We find that a country’s stock index with a high crash risk relates to a higher stock return as a risk premium across countries. The international crash risk premium exists robustly after controlling for volatility risk, macroeconomic variables, sensitivities to the international risk factors, and realized return moments. In contrast, other international risk premiums do not exist based on the exposure of such control variables. Based on the crash risk premium, we construct international stock trading strategies by sorting option-implied skewness across countries that outperform benchmark strategies by sorting the above control variables.
•A strong positive relationship exists between crash risk and the cross-section of subsequent index returns across countries, indicating the existence of an international crash risk premium.•The international stock portfolio exposed to crash risk earns economically and statistically meaningful risk premiums in the cross-section.•The international crash risk premium exists robustly after controlling for common international risk sources and characteristics, including volatility risk, macroeconomic variables, sensitivities to the international risk factors, and realized return moments.•By sorting crash risk or option-implied skewness, international stock trading strategies across countries outperform benchmark strategies by sorting the above control variables.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
Market skewness risk is priced, but the components of its premium are not fully understood. We propose new trading strategies decomposing the skewness risk premium into jump and leverage effect ...components, and we analyze the skewness risk premia in the market for S&P 500 index options. We find that the skewness premium is higher when markets are closed than during trading hours, consistently with uncertainty resolution patterns by non-U.S investors; that it increases after left-tail market events; and that it is distinct from the variance premium. Moreover, during trading hours, the skewness premium is dominated by priced jump risk.
This paper was accepted by Kay Giesecke, finance.
Funding:
P. Orłowski acknowledges financial support from the Doc.Mobility program of the Swiss National Science Foundation Project P1TIP1_161875 “Option portfolio returns and dispersion”. P. Schneider acknowledges financial support from the Swiss National Science Foundation Projects 169582 “Model-free asset pricing” and 189086 “Scenarios”. F. Trojani and P. Orłowski acknowledge financial support from the Swiss National Science Foundation Project 150198 “Higher order robust resampling and multiple testing methods” and the Swiss Finance Institute Project “Term structures and cross-sections of asset risk premia”. F. Trojani gratefully acknowledges support from the AXA Chair in Socioeconomic Risks of Financial Markets at the University of Turin.
Supplemental Material:
The data files and online appendices are available at
https://doi.org/10.1287/mnsc.2023.4734
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This paper was accepted by Tyler Shumway, finance.
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•We use risk-neutral densities to measure market expectations regarding COVID-19.•Markets reacted late after ignoring several warnings by the World Health Organization.•Stock indices reacted strongly and simultaneously after the Lombardy lockdown.•From mid-March onwards, risk-neutral densities develop differently across countries.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
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FZAB, GIS, IJS, KILJ, NLZOH, NUK, OILJ, SBCE, SBMB, UL, UM, UPUK
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
The equity market is not trading around the clock, and the overnight information has been proved be important for understanding pricing anomalies, improving volatility forecasting accuracy, and so ...forth. However, there is little research investigating its impact on option pricing. In this paper, we provide a framework that integrates intraday, overnight returns, and realized volatility simultaneously within an augmented Autoregressive Volatility model. The analytical option‐pricing formula for the new model is derived through the closed‐form moment generation function. The empirical results based on S&P 500 index options show that distinguishing the overnight component from daily returns has the potential capability to reduce the pricing errors, both in‐sample and out‐of‐sample.
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FZAB, GIS, IJS, KILJ, NLZOH, NUK, OILJ, SBCE, SBMB, UL, UM, UPUK
This study examines the directional information content realized by trades in a highly liquid options market by constructing put–call volume ratios and decoupled options‐to‐spot volume ratios. By ...investigating whether the specific investor type predicts underlying returns and the method used to exploit a directional information advantage, we find that foreign investment firms can leverage their directional information by executing buy trades to open new positions. Their open‐buy trades significantly predict next‐day spot returns, whereas trades initiated by domestic firms do not. This relationship becomes stronger for out‐of‐the‐money, large, and short‐horizon options trades and during the short‐sale restriction period.
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FZAB, GIS, IJS, KILJ, NLZOH, NUK, OILJ, SBCE, SBMB, UL, UM, UPUK
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