IFin Seminar, Michael Hasler, UT Dallas, Naveen Jindal School of Management "A Macro-Finance Model for Option Prices: A Story of Rare Economic Events"
Institute of Finance
Date: 2 December 2021 / 12:25 - 13:40
Speaker: Michael Hasler, UT Dallas, Naveen Jindal School of Management
Title: "A Macro-Finance Model for Option Prices: A Story of Rare Economic Events"
Date: December 2, 2021
Room: A32 (Red Building)
We propose a macro-finance model that rationalizes robust features in equity-index option markets. When rare disasters are followed by economic recoveries, the slope of the implied volatility term structure is positive in good times but turns negative in bad times. Additionally, implied volatility decreases with moneyness in bad times (volatility skew), while the shape becomes a smile in good times in the presence of rare economic booms. Our theory contributes to understanding the dynamics of the implied volatility surface while keeping standard asset pricing moments realistic.