- University of Lugano
Wednesday, November 15, 2017
- Polo Santa Marta, Via Cantarane 24, Room 1.59
This paper introduces a model-free decomposition of S&P 500 forward market index returns in terms of realized and implied dispersion, downside, and tail risk. The decomposition utilizes a novel conditional frequency analysis on the basis of available options rather than the times series of the S&P 500. Empirically, downside risk accounts for most of the forward market return, while symmetric tail risk is not prominently featured. The predictable, persistent part of the realized return is very small. Nevertheless, signals revealed by this risk anatomy provide predictive out-of-sample power for realized returns in particular for longer maturities. Furthermore, it indicates that models with identically and independently distributed state variables are generally misspecified in this market, and that care must be taken when calibrating disaster risk models.