A New Measure of Crisis Risk and Its Pricing in the Time Series and Cross-section of Stock Returns

Historically, economic and financial crises are characterized by a surge in the implied volatility of short-term (as opposed to long-term) put options (as opposed to to call options). We propose a new method to capture both effects, the result of which is the new variable spc, which predicts both the time series and the cross-section of stock returns. In this proposal, we present the summary statistics of spc and our preliminary evidence on its pricing. We are currently working to expand our analysis to link the time series predictability with the implications of leading asset pricing models. Our time series evidence could become a new target moment for evaluating all asset pricing models. To this end, the main objective of this proposed project is to seek financial support for one full-time RA or Ph.D. student to help us expand our analysis.