Detecting Political Event Risk In The Option Market

Alex Kostakis, Liangyi Mu, Yoichi Otsubo

Research output: Contribution to journalArticlepeer-review


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 languageEnglish
Article number106624
JournalJournal of Banking and Finance
Early online date5 Aug 2022
Publication statusPublished - 1 Jan 2023


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


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