The Department of Finance and Risk Engineering welcomes Oleg Bondarenko, Professor, the University of Illinois at Chicago, to the BQE Lecture Series on Thursday, November 19, 2020, at 6 p.m. on Zoom.
Meeting ID: 991 8744 0867
Password: BQEOB
Title
Option-Implied Dependence and Correlation Risk Premium
Abstract
We propose a novel model-free approach to obtain the joint risk-neutral distribution among several assets that is consistent with all market prices of options on these assets and their weighted index. In an empirical application, we use options on the S&P 500 index and its nine industry sectors. The results of our analysis reveal that the option-implied dependence for the nine sectors is highly non-normal, asymmetric, and time-varying. The estimated joint distribution allows us to study two conditional correlations: when the market moves down or up. We find that the risk premium for the down correlation is strongly negative, while the opposite is true for the up correlation. These findings are consistent with the economic intuition that investors dislike the loss of diversification when markets fall, but they actually prefer high correlation when markets rally.
Bio
Oleg Bondarenko is a Professor of Finance at the University of Illinois at Chicago. He received an MS degree from the Moscow Institute of Physics and Technology and a Ph.D. from the California Institute of Technology. His primary research interests include option pricing, financial econometrics, and market microstructure. His research has appeared in top Finance and Economics journals and has been featured in Morningstar, Economist, and other media outlets.
Professor Bondarenko has consulted with several investment firms and currently serves on the Product Development Committee of Chicago Board Options Exchange (Cboe). His research has been supported by the Chicago Mercantile Exchange, Cboe, Institute of Structured Finance, and Derivatives, among others. He has written two research studies commissioned by Cboe. Professor Bondarenko held visiting faculty positions at the Olin School of Business, Washington University in St. Louis, and Kellogg School of Management, Northwestern University.