Gold Jump Risk, Rare Macroeconomic Disaster Probability, and Expected Stock Returns

ABSTRACT We derive a model‐free index that serves as a proxy for the time‐varying probability of rare macroeconomic disasters by extracting risk‐neutral jump information from options on gold futures. Based on gold serving as a safe haven during extreme market events (Baur and McDermott 2010; Ming et al. 2023), we isolate the jump component of gold options prices to capture tail‐risk‐driven safe‐haven demand. We establish the macroeconomic foundations of the index by demonstrating that it responds to fundamental economic conditions and predicts key macroeconomic indicators. The index exhibits strong predictive power for stock returns across multiple horizons. The index captures safe‐haven demand for gold, which spikes when investors perceive elevated disaster risk. The index exhibits persistent variation in risk and serves as a proxy for key economic state variables. Our index predicts future stock returns, explains variations in the cross‐section of stock returns, and shows significant correlations with option‐based tail risk measures.