Idiosyncratic Jump Risk Matters: Evidence from Equity Returns and Options

Bégin, Jean-François; Dorion, Christian; Gauthier, Geneviève

doi:10.1093/rfs/hhz043

Cited by 60 publications

(14 citation statements)

References 90 publications

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“…Ref. [37], while conducting an extensive joint estimation analysis of option-pricing models, extracts the expected risk premium associated with each risk factor and reveals the significance of idiosyncratic risk. Ref.…”

Section: Risks and Mitigationmentioning

confidence: 99%

Analytical Modeling and Empirical Analysis of Binary Options Strategies

2022

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This study analyzes binary option investment strategies by developing mathematical formalism and formulating analytical models. The binary outcome of binary options represents either an increase or a decrease in a parameter, typically an asset or derivative. The investor receives only partial returns if the prediction is correct but loses all the investment otherwise. Mainstream research on binary options aims to develop the best dynamic trading strategies. This study focuses on static tactical easy-to-implement strategies and investigates the performance of such strategies in relation to prediction accuracy, payout percentage, and investment strategy decisions.

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Section: Risks and Mitigationmentioning

confidence: 99%

Analytical Modeling and Empirical Analysis of Binary Options Strategies

2022

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“…While Merton (1976) suggests that investors can mitigate such idiosyncratic jump risks through diversification strategies, recent studies have challenged this conventional wisdom. For instance, Bégin et al (2020) show that idiosyncratic jump risk is priced in options and it helps explain excess equity returns.…”

Section: Introductionmentioning

confidence: 99%

Systemic Tail Risk: High-Frequency Measurement, Evidence and Implications

Neely¹,

Yang²,

Erdemlioglu³

2023

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We develop a new framework to measure market-wide (systemic) tail risk in the cross-section of high-frequency stock returns. We estimate the time-varying jump intensities of asset prices and introduce a testing approach that identifies multi-asset tail risk based on the release times of scheduled news announcements. Using high-frequency data on individual U.S. stocks and sector-specific ETF portfolios, we find that most of the FOMC announcements create systemic left tail risk, but there is no evidence that macro announcements do so. The magnitude of the tail risk induced by Fed news varies over the business cycle, peaks during the global financial crisis and remains high over different phases of unconventional monetary policy. We use our approach to construct a Fed-induced systemic tail risk (STR) indicator. STR helps explain the pre-FOMC announcement drift and significantly increases variance risk premia, particularly for the meetings without press conferences.

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“…The price of idiosyncratic risk in equity returns and risk premiums has always been an important topic for corporate finance academics and experts. Despite the mixed evidence, several empirical works highlight the importance of idiosyncratic risk in the stock market (see, among others, Goyal & Santa-Clara, 2003 and recently Begin et al, 2020;Bozhkov et al, 2020). The topic is timely also considering the effect of the specific risk in the recent pandemic situation (Baek et al, 2020) and the determinants of this kind of risk (see for example Zhang, 2016).…”

Section: Introductionmentioning

confidence: 99%

Pricing the Idiosyncratic Risk in the Cost of Capital: A Comprehensive Model

Beltrame¹,

Zorzi²

2022

TEL

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Despite the mixed evidence, recent empirical works highlight the importance of idiosyncratic risk in the stock market. On this basis, this note elaborates an approach to price directly the specific risk in the cost of capital, both for scientific empirical purposes and practitioner's investment valuation. For extremely high leverage values, the cost of risky debt tends to approximate the unlevered cost of capital. Exploiting a Merton model, we show a simple solution to calculate in practice every cost of capital version, providing a comprehensive framework. A worked example is provided to simplify the concrete application.

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Idiosyncratic Jump Risk Matters: Evidence from Equity Returns and Options

Cited by 60 publications

References 90 publications

Analytical Modeling and Empirical Analysis of Binary Options Strategies

Analytical Modeling and Empirical Analysis of Binary Options Strategies

Systemic Tail Risk: High-Frequency Measurement, Evidence and Implications

Pricing the Idiosyncratic Risk in the Cost of Capital: A Comprehensive Model

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