Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/288261 
Year of Publication: 
2023
Citation: 
[Journal:] Journal of Futures Markets [ISSN:] 1096-9934 [Volume:] 43 [Issue:] 12 [Publisher:] Wiley [Place:] Hoboken, NJ [Year:] 2023 [Pages:] 1807-1835
Publisher: 
Wiley, Hoboken, NJ
Abstract: 
This research addresses the estimation of measures of rare disaster concerns from option prices. We propose a new smile construction approach to obtain the required continuum of implied volatilities from discretely sampled observations that are affected by microstructure noise. We extrapolate implied volatilities of far out‐of‐the‐money options by modeling the tails of the risk‐neutral return distribution (RND) ensuring that option prices do not admit arbitrage. Our numerical analysis and empirical application show that the RND‐based approach consistently outperforms standard techniques. It substantially reduces estimation errors resulting in considerably higher estimates of the rare disaster concern index (RIX ${\mathbb{RIX}}$) when event risk is high.
Subjects: 
microstructure noise
numerical errors
option‐implied risk measures
rare disaster concerns
volatility smile construction
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article
Document Version: 
Published Version

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