A New Predictor of U.S. Real Economic Activity: The S&P 500 Option Implied Risk Aversion

• Published in: Management science Vol. 65; no. 10; pp. 4927 - 4949
• Main Authors: Faccini, Renato, Konstantinidi, Eirini, Skiadopoulos, George, Sarantopoulou-Chiourea, Sylvia
• Format: Journal Article
• Language: English
• Published: Linthicum INFORMS 01.10.2019; Institute for Operations Research and the Management Sciences
• Subjects: Economic activity; Economic conditions; Economic growth; Markets; option prices; prediction; Prices; production economy model; real economic activity; Risk; Risk aversion; Risk factors; Securities prices; Stock exchanges; Stock prices; United States > US; South Korea

We propose a new predictor of U.S. real economic activity (REA)—namely, the representative investor’s implied relative risk aversion (IRRA) extracted from S&P 500 option prices. IRRA is forward-looking and hence is expected to be related to future economic conditions. We document that U.S. IRRA...