Albert, PascalPascalAlbertHerold, MichaelMichaelHeroldMuck, MatthiasMatthiasMuck2023-09-052023-09-0520230270-73141096-9934https://fis.uni-bamberg.de/handle/uniba/90345This research addresses the estimation of measures of rare disaster concerns from option prices. We propose a new smile construction approach to obtain the required continuum of implied volatilities from discretely sampled observations that are affected by microstructure noise. We extrapolate implied volatilities of far out-of-the-money options by modeling the tails of the risk-neutral return distribution (RND) ensuring that option prices do not admit arbitrage. Our numerical analysis and empirical application show that the RND-based approach consistently outperforms standard techniques. It substantially reduces estimation errors resulting in considerably higher estimates of the rare disaster concern index (RIX) when event risk is high.engmicrostructure noisenumerical errorsoption-implied risk measuresrare disaster concernsvolatility smile construction330650article10.1002/fut.22457