Good States, Bad States: What Do Options Tell Us About Schizophrenic Behavior of Mr. Market and What Can We Do About It?

Vol. 19, No. 4, 2021

Vineer Bhansali and Jeremie Holdom

Option prices theoretically encapsulate participants’ expectations about good state (bullish) and bad state (bearish) market outcomes. By using a mixture of distributions and reasonable assumptions, the authors extract time series of expected returns, volatilities, and mixture probabilities of these outcomes surrounding the current US elections. The bimodality of asset return distributions suggests important modifications for asset allocation and risk management.