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Volatility-and-the-Equity-Risk-Premium

Code written for the empirical part of my master thesis "Volatility and the Equity Risk Premium". The code constructs a volatility linked real time index of the equity risk premium and its term structure according to "What is the Expected Return on the Market?" (Martin, 2017). Further, probabilities of a 20% market decline implied by option prices are calculated.

Data

  • The option price data is obtained from OptionMetrics.

Code

  • SVIXConstruction.py - Given European S&P 500 option price data, an index of the equity risk premium (called SVIX) is constructed at 5 maturities.
  • CrashProbabilities.py - Given European S&P 500 put option price data, the implied probability of a 20% market correction is calculated.
  • TermStructure.py - Given the SVIX index, a term strucutre of equity risk premia is constructed.

Links

What is the Expected Return on the Market? (Martin, 2017) available under.