@article{7a546e803ee9442894cb6210b06cff10,
title = "Detecting Political Event Risk In The Option Market",
abstract = "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.",
keywords = "Political Event Risk, Option-Implied Information, Risk-Neutral Distribution, Implied Volatility Curve, Brexit Referendum",
author = "Alex Kostakis and Liangyi Mu and Yoichi Otsubo",
note = "Funding Information: We would like to thank Carol Alexander (Editor) and two anonymous referees for their insightful suggestions. We would also like to thank Arie Gozluklu, Yifan Li, participants at the 2018 AMBS Doctoral Conference, the 2019 SoFiE Summer Schools at Kellogg School of Management and New York University Shanghai as well as seminar participants at the Bank of Canada for helpful suggestions and comments. Kostakis acknowledges financial support by the Alliance Manchester Business School Strategic Research Investment Fund. Funding Information: ☆ We would like to thank Carol Alexander (Editor) and two anonymous referees for their insightful suggestions. We would also like to thank Arie Gozluklu, Yifan Li, participants at the 2018 AMBS Doctoral Conference, the 2019 SoFiE Summer Schools at Kellogg School of Management and New York University Shanghai as well as seminar participants at the Bank of Canada for helpful suggestions and comments. Kostakis acknowledges financial support by the Alliance Manchester Business School Strategic Research Investment Fund. Publisher Copyright: {\textcopyright} 2022",
year = "2023",
month = jan,
day = "1",
doi = "10.1016/j.jbankfin.2022.106624",
language = "English",
volume = "146",
journal = "Journal of Banking and Finance",
issn = "0378-4266",
publisher = "Elsevier BV",
}