How Likely and How Deep? Sharp Joint Bounds on Risk-Neutral Crash Probability and Conditional Depth from Option Bid-Ask Quotes
Option quotes with bid-ask spreads do not point-identify the risk-neutral probability of a crash below a given threshold, nor the expected depth of the crash once the threshold is breached. Bounds computed separately for the two quantities can mislead, because their endpoints may be attained by different risk-neutral distributions. We...