TY  - JOUR
AU  - Backus,David
AU  - Chernov,Mikhail
AU  - Martin,Ian
TI  - Disasters implied by equity index options
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15240
PY  - 2009
Y2  - August 2009
UR  - http://www.nber.org/papers/w15240
L1  - http://www.nber.org/papers/w15240.pdf
N1  - Author contact info:
David Backus
Stern School of Business
NYU
44 West 4th Street
New York, NY 10012-1126
Tel: 212/998-0873
Fax: 212/995-4221
E-Mail: dbackus@stern.nyu.edu

Mikhail Chernov
London School of Economics
Houghton Street
London, WC2A 2AE
United Kingdom
E-Mail: m.chernov@lse.ac.uk

Ian Martin
Graduate School of Business
Stanford University
Stanford, CA 94305
Tel: 650/721-1297
E-Mail: ian.martin@gsb.stanford.edu
AB  - We use prices of equity index options to quantify the impact of extreme events on asset returns.  We define extreme events as departures from normality of the log of the pricing kernel and summarize their impact with high-order cumulants: skewness, kurtosis, and so on.  We show that high-order cumulants are quantitatively important in both representative-agent models with disasters and in a statistical pricing model estimated from equity index options.  Option prices thus provide independent confirmation of the impact of extreme events on asset returns, but they imply a more modest distribution of them.
ER  -