This empirical research reveals their stochastic dynamical nature of traded securities prices and leeds to the understanding of the probability distribution of stock prices, market indices and their derivatives.
Once these market probabilities are computed and understood, we can utilize a more skilled financial risk management approach. To this end we developed from market implied probabilities the FEER-Index: Forecasting Extreme Event Risk. In a collaborative work with my M.Sc student Amitay Kauffman, We theoretically constructed a new mathematical measure over the probability space of the tail distribution rising from implied traded probabilities. We combined it with the new innovative ‘No Bankruptcy’ measure suggested by Sergio Hart to form a live financial index that can alert us prior to financial market crushes.
We continue this work with a Pertinent Measure of Risk called the Profit- index based on Robert Aumann Economic Index of Riskiness. We constructed a new live index which separate general risk averse investors from extreme events aversion that applies only for bankruptcy events. For further reading please refer to Construction of the FEER Index-Forecasting Extreme Events Risk and Profit Index-Pertinent Risk of Financial Investment. Both of these works need a thorough empirical investigation to validate the efficiency of these indices.