Wan Ni Lai

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.”