Studies from Federal Reserve Board Provide New Data on Financial Economics (Rare Disaster Probability and Options Pricing)

2021 MAR 29 (NewsRx) -- By a News Reporter-Staff News Editor at Disease Prevention Daily -- Investigators discuss new findings in Finance - Financial Economics. According to news reporting from Washington, District of Columbia, by NewsRx journalists, research stated, “We derive an options-pricing formula from recursive preferences and estimate rare disaster probability.”

The news correspondents obtained a quote from the research from Federal Reserve Board, “The new options-pricing formula applies to far out-of-the-money put options on the stock market when disaster risk dominates, the size distribution of disasters follows a power law, and the economy has a representative agent with a constant-relative-risk-aversion utility function. The formula conforms with options data on the Standard & Poor’s (S&P) 500 Index from 1983 to 2018 and for analogous indices for other countries.”

According to the news reporters, the research concluded: “The disaster probability, inferred from monthly fixed effects, is highly correlated across countries, peaks during the Global Financial Crisis, and forecasts rates of economic growth.”

This research has been peer-reviewed.

For more information on this research see: Rare Disaster Probability and Options Pricing. Journal of Financial Economics, 2021;139(3):750-769. Journal of Financial Economics can be contacted at: Elsevier Science Sa, PO Box 564, 1001 Lausanne, Switzerland. (Elsevier - www.elsevier.com; Journal of Financial Economics - http://www.journals.elsevier.com/journal-of-financial-economics/)

Our news journalists report that additional information may be obtained by contacting Gordon Y. Liao, Federal Reserve Board, 20TH & C Streets NW, Washington, DC 20551, United States.

The direct object identifier (DOI) for that additional information is: https://doi.org/10.1016/j.jfineco.2020.10.001. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.

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