Wan Ni Lai

Interdisciplinary seminars
finance seminar

Wan Ni Lai

Skema Business School
Detecting stock market regimes via horizon effects in the option implied equity risk premium
Tuesday, May 25 2021| 2:30pm

Eric Girardin: eric.girardin[at]univ-amu.fr
Christelle Lecourt: christelle.lecourt[at]univ-amu.fr


“Asset prices observed in the equity market often exhibit abrupt changes. While some changes can be momentary (jumps), other changes can persist for a longer period. Regime switching models are commonly employed in the equity market returns to capture this behaviour. We show that forward-looking information extracted from option prices improves regime detection. In particular, horizon differences in option-implied equity risk premia allow earlier detection of regime switches and produces clear regime switching probabilities. This finding holds across recent disaster periods like the 2008-2009 financial crisis and the 2020 Covid pandemic outbreak, in both US and emerging equity markets.”