Ian Martin

The London School of Economics and Political Science | LSE · Department of Finance

We use equity index options to quantify the distribution of consumption growth disasters. The challenge lies in connecting the risk-neutral distribution of equity returns implied by options to the true distribution of consumption growth. First, we compare pricing kernels constructed from macro-finance and option-pricing models. Second, we compare o...

I explore the behavior of asset prices and the exchange rate in a two-country world. When the large country has bad news, the relative price of the small country’s output declines. As a result, the small country’s bonds are risky, and uncovered interest parity fails, with positive excess returns available to investors who borrow at the large countr...

This paper investigates the behavior of asset prices in an endowment economy in which a representative agent with power utility consumes the dividends of multiple assets. The assets are Lucas trees; a collection of Lucas trees is a Lucas orchard. The model generates return correlations that vary endogenously, spiking at times of disaster. Since dis...

The large asset price jumps that took place during 2008 and 2009 disrupted volatility derivatives markets and caused the single-name variance swap market to dry up completely. This paper defines and analyzes a simple variance swap, a relative of the variance swap that in several respects has more desirable properties. First, simple variance swaps a...

The expected time- and risk-adjusted cumulative return on any asset equals one at all horizons. Nonetheless, I show that a typical asset's realized time- and risk-adjusted cumulative return tends to zero almost surely. As a corollary, the value of a typical long-dated asset is driven by extreme events: either by good news at the level of the indivi...

We use prices of equity index options to quantify the impact of extreme events on asset returns. We define extreme events as departures from normality of the log of the pricing kernel and summarize their impact with high-order cumulants: skewness, kurtosis, and so on. We show that high-order cumulants are quantitatively important in both representa...

We contribute to "disaster" research by using prices of equity index options to quantify the impact of extreme events on asset returns, including the average excess return on a broad-based equity index. We define extreme events as departures from lognormality and summarize their impact with high-order cumulants of the (log) pricing kernel. We show...

The fundamental equation of asset pricing states that the expected time-and risk-adjusted cumulative return on any asset equals one at all horizons. This paper arrives, via a theorem of Kakutani, at an apparently paradoxical result: for a typical asset, the realized time-and risk-adjusted cumulative return tends to zero with probability one. As a s...

There is renewed interest in the fact that rare disasters can have a significant impact on asset prices, and in particular can contribute to an explanation of the equity premium puzzle. If such rare disasters are indeed important, their influence should be detected in option prices. Working in a consumption-based framework, I provide a pricing form...