Carole Bernard (Grenoble Ecole de Management)
1 July 2021 @ 12:00 - 13:15
“Option-Implied Dependence and Correlation Risk Premium”
Abstract: We propose a novel model-free approach to obtain the joint risk-neutral distribution among several assets that is consistent with market prices of options on these assets and their weighted index. In an empirical application, we use options on the S&P 500 index and its nine industry sectors. The results of our analysis reveal that the option-implied dependence for the nine sectors is highly nonnormal, asymmetric, and time-varying. We then study two conditional correlations: when the market moves down or up. The risk premium for the down correlation is strongly negative, while the opposite is true for the up correlation. These findings are consistent with the economic intuition that investors dislike the loss of diversification when markets fall, but they actually prefer high correlation when markets rally.