Updated with data through May 16, 2013
May 16, 2013 [PDF]
Trading in options on bank stocks was near six month averages last week. Upside volume percentages were high the CCAR firms (note the last blue bar in the chart below). Spot returns in the group were up smartly again including double digit percentage increases for MS and STT over the past two weeks. The median CCAR bank stock rose 6.6%.
RNPD standard deviations generally rose modestly relative to our last report and RNPD skews became less negative. Risk neutral probabilities of large changes remain in their downward trends.
Other Commodity Markets
We continue to measure high volumes in the options markets across the spectrum of commodities and indices we follow. Changes in RNPD standard deviations derived from options were mixed, rising for the precious metals and the S&P 500, but falling for the grains.
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Large changes in asset values or commodities prices can be associated with significant changes in economic output and price and financial stability. For that reason, policymakers seek to monitor market concerns about extreme movements—so-called tail events—in key asset and commodities markets. The prices of options to buy (“call options”) or sell (“put options”) assets or commodities in the future at specified prices (“strike prices”) provide valuable information about potential tail events. The prices of call and put options with differing strike prices can be used to estimate a probability density function of the payoff of the underlying asset or commodity.
In this report, we use options prices to produce what are known as “risk-neutral probability density functions” (RNPDs) for future asset and commodity values. Interpreting RNPDs can be subtle, because they combine both investors’ expectations of the future price of the traded asset or commodity and the compensation they received for taking on related aggregate economic risks. The changes over time in RNPDs that we show reflect changes to both of these components, and decomposing the change into the constituent parts is not possible without making additional strong assumptions. Nonetheless, we regard the RNPDs shown here as valuable barometers of financial market sensitivity to possible extreme movements in the prices of key assets and commodities.
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The exhibits contained in this report show density functions at three different points in time, allowing viewers to see how risk-neutral expectations of market participants have evolved over time. Specifically, we think it isuseful to examine the following characteristics within each exhibit and note how they have changed over time: