Detecting Political Event Risk In The Option Market

Alexandros Kostakis; Liangyi Mu; Yoichi Otsubo

doi:10.1016/j.jbankfin.2022.106624

Detecting Political Event Risk In The Option Market

Alexandros Kostakis^*, Liangyi Mu, Yoichi Otsubo

^*Corresponding author for this work

Queen's Business School (QBS)

Research output: Contribution to journal › Article › peer-review

3 Citations (Scopus)

52 Downloads (Pure)

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.

Original language	English
Article number	106624
Journal	Journal of Banking & Finance
Early online date	05 Aug 2022
DOIs	https://doi.org/10.1016/j.jbankfin.2022.106624
Publication status	Early online date - 05 Aug 2022

Keywords

Political Event Risk
Option-Implied Information
Risk-Neutral Distribution
Implied Volatility Curve
Brexit Referendum

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10.1016/j.jbankfin.2022.106624Licence: Unspecified

Detecting Political Event Risk In The Option Market
Copyright 2022 Elsevier. This manuscript is distributed under a Creative Commons Attribution-NonCommercial-NoDerivs License (https://creativecommons.org/licenses/by-nc-nd/4.0/), which permits distribution and reproduction for non-commercial purposes, provided the author and source are cited.
Accepted author manuscript, 2.15 MBLicence: CC BY-NC-ND

Cite this

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title = "Detecting Political Event Risk In The Option Market",

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.",

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AB - 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.

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KW - Option-Implied Information

KW - Risk-Neutral Distribution

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JF - Journal of Banking & Finance

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Detecting Political Event Risk In The Option Market

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Keywords

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