Tail risk aversion and backwardation of index futures

DOI10.1080/14697688.2024.2330612MaRDI QIDQ6576882zbMATH OpenFDO

Authors Jufang Liang, Dan Yang

Publication date 23 July 2024

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1080/14697688.2024.2330612

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Derivative securities (option pricing, hedging, etc.) (91G20) Statistical methods; risk measures (91G70)

Review text

The paper deals with the dependence between the price of the future contract and the price of the underlying asset. The starting point is the classical ``cost-of-carry model\N\[\NF_{t,T}= S_t \exp((r-d)(T-t)),\N\]\Nwhere \(T\) is the maturity, \(r\) and \(d\) are the risk-free rate and dividend yield. At the example of China Financial Future Exchange quotations during the 2015 market crash, the authors show that ``in the real life under the stress conditions the above theoretical formula is not ``fully valid. The so called backwardation is observed. The authors provide and test several hypotheses quantifying these phenomena.

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Cites work

• Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities
• The market for crash risk
• VAR for VaR: measuring tail dependence using multivariate regression quantiles

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