Detecting Political Event Risk In The Option Market

Kostakis, Alexandros ORCID: 0000-0002-2358-6484, Mu, Liangyi and Otsubo, Yoichi (2022) Detecting Political Event Risk In The Option Market. Journal of Banking and Finance, 146. p. 106624.

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Official URL: http://dx.doi.org/10.1016/j.jbankfin.2022.106624

Abstract

This study shows that the option market can ex ante detect and quantify the effects of political event risk. Focussing on the 2016 UK referendum on EU membership, we find that the Risk-Neutral Distribution extracted from GBPUSD futures options whose expiry spans the referendum date becomes bimodal and the Implied Volatility curve exhibits an unusual W-shape. To the contrary, the corresponding effects for FTSE100 are found to be very limited. The large swings in expectations regarding the event outcome during the referendum night allow us to observe the counterfactual and validate the ex ante information revealed in the option market.

Item Type:	Article
Uncontrolled Keywords:	Political event risk, Option-implied information, Risk -neutral distribution, Implied volatility curve, Brexit referendum
Depositing User:	Symplectic Admin
Date Deposited:	10 Oct 2022 07:51
Last Modified:	05 Feb 2024 02:30
DOI:	10.1016/j.jbankfin.2022.106624
Related URLs:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3165299