Title: On market price extremes of underlying shares in the options market
Authors: Marie Kratz - ESSEC Business School, CREAR (France) [presenting]
Abstract: Different quantitative methods are examined to recover the risk neutral distribution function associated with the prices of option on bank shares. After having assessed their qualities by recovering market option prices from these distributions, we compare Value-at-Risk implied by the estimated risk neutral distribution to historical Value-at-Risk of the share prices. Option prices of American banks designated as SIFIs (Systemic Financial Institutions) are considered. We show that, contrary to what is to be expected for a market composed of risk averse investors, the implicit VaR is under-estimated compared to the one obtained from real data in normal times, while over-estimated in times of crisis. Consequences of this result will be discussed to monitor market sentiments.