%0 Journal Article %1 Backus:JF:2011 %A Backus, David %A Chernov, Mikhail %A Martin, Ian %D 2011 %I Blackwell Publishing Inc %J The Journal of Finance %K disaster equity-premium option-implied %N 6 %P 1969-2012 %R 10.1111/j.1540-6261.2011.01697.x %T Disasters Implied by Equity Index Options %U http://dx.doi.org/10.1111/j.1540-6261.2011.01697.x %V 66 %X 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.

@article{Backus:JF:2011, 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.}, added-at = {2014-10-30T20:00:38.000+0100}, author = {Backus, David and Chernov, Mikhail and Martin, Ian}, biburl = {https://www.bibsonomy.org/bibtex/2cb7c88d1bccf3dc650ebb296f2a7bc81/fcqms}, description = {Disasters Implied by Equity Index Options - BACKUS - 2011 - The Journal of Finance - Wiley Online Library}, doi = {10.1111/j.1540-6261.2011.01697.x}, interhash = {31d2d11f7dc287fd7e364f5d4954cb7b}, intrahash = {cb7c88d1bccf3dc650ebb296f2a7bc81}, issn = {1540-6261}, journal = {The Journal of Finance}, keywords = {disaster equity-premium option-implied}, number = 6, pages = {1969-2012}, publisher = {Blackwell Publishing Inc}, timestamp = {2014-10-30T20:00:38.000+0100}, title = {Disasters Implied by Equity Index Options}, url = {http://dx.doi.org/10.1111/j.1540-6261.2011.01697.x}, volume = 66, year = 2011 }