Jump and Volatility Risk and Risk Premia PDF Download
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Author: Pedro Santa-Clara
Publisher:
ISBN:
Category : Options (Finance) - Econometric models
Languages : en
Pages : 48
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Book Description
We use a novel pricing model to filter times series of diffusive volatility and jump intensity from S&P 500 index options. These two measures capture the ex-ante risk assessed by investors. We find that both components of risk vary substantially over time, are quite persistent, and correlate with each other and with the stock index. Using a simple general equilibrium model with a representative investor, we translate the filtered measures of ex-ante risk into an ex-ante risk premium. We find that the average premium that compensates the investor for the risks implicit in option prices, 10.1 percent, is about twice the premium required to compensate the same investor for the realized volatility, 5.8 percent. Moreover, the ex-ante equity premium that we uncover is highly volatile, with values between 2 and 32 percent. The component of the premium that corresponds to the jump risk varies between 0 and 12 percent.
Author: Pedro Santa-Clara
Publisher:
ISBN:
Category : Options (Finance) - Econometric models
Languages : en
Pages : 48
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Book Description
We use a novel pricing model to filter times series of diffusive volatility and jump intensity from S&P 500 index options. These two measures capture the ex-ante risk assessed by investors. We find that both components of risk vary substantially over time, are quite persistent, and correlate with each other and with the stock index. Using a simple general equilibrium model with a representative investor, we translate the filtered measures of ex-ante risk into an ex-ante risk premium. We find that the average premium that compensates the investor for the risks implicit in option prices, 10.1 percent, is about twice the premium required to compensate the same investor for the realized volatility, 5.8 percent. Moreover, the ex-ante equity premium that we uncover is highly volatile, with values between 2 and 32 percent. The component of the premium that corresponds to the jump risk varies between 0 and 12 percent.
Author: John Matovu
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 32
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Book Description
There is strong evidence that interest rates and bond yield movements exhibit both stochastic volatility and unanticipated jumps. The presence of frequent jumps makes it natural to ask whether there is a premium for jump risk embedded in observed bond yields. This paper identifies a class of jump-diffusion models that are successful in approximating the term structure of interest rates of emerging markets. The parameters of the term structure of interest rates are reconciled with the associated bond yields by estimating the volatility and jump risk premia in highly volatile markets. Using the simulated method of moments (SMM), results suggest that all variants of models which do not take into account stochastic volatility and unanticipated jumps cannot generate the non-normalities consistent with the observed interest rates. Jumps occur (8,10) times a year in Argentina and Brazil, respectively. The size and variance of these jumps is also of statistical significance.
Author: Mark Broadie
Publisher:
ISBN:
Category :
Languages : en
Pages : 71
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Book Description
This paper examines specification issues and estimates volatility and jump risk premia using the information in the cross-section of Samp;P futures options from 1987 to 2003. We first test for the presence of jumps in volatility by analyzing the higher moment behavior of option implied variance, and we find strong evidence supporting their presence. Based on cross-sectional fit, we find strong evidence for jumps in prices, and modest evidence for jumps in volatility. Regarding the factor risk premiums, we are not able to identify a statistically significant volatility risk premium, but are able to identify statistically significant, although modest jump risk premiums. The jump risk premiums are economically meaningful as they contribute a significant component to the equity risk premium and can explain observed put returns.
Author: Jonathan H. Wright
Publisher:
ISBN:
Category : Bonds
Languages : en
Pages : 64
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Book Description
Author: Jared Woodard
Publisher: Pearson Education
ISBN: 0132756129
Category : Business & Economics
Languages : en
Pages : 49
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Book Description
Master the new edge in options trades: the hidden volatility risk premium that exists in options for every major asset class. One of the most exciting areas of recent financial research has been the study of how the volatility implied by option prices relates to the volatility exhibited by their underlying assets. Here, I’ll explain the concept of the volatility risk premium, present evidence for its presence in options on every major asset class, and show how to estimate, predict, and trade on it....
Author: Maximilian Neumann
Publisher:
ISBN:
Category :
Languages : en
Pages : 39
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Book Description
We analyze the risk premia embedded in the S&P 500 spot index and option markets. We use a long time-series of spot prices and a large panel of option prices to jointly estimate the diffusive stock risk premium, the Price jump risk premium, the diffusive variance risk premium and the variance jump risk premium. The risk premia are statistically and economically significant and move over time. Investigating the economic drivers of the risk premia, we are able to explain up to 63% of these variations.
Author: Athanasios Bolmatis
Publisher:
ISBN:
Category :
Languages : en
Pages : 49
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Book Description
We study the volatility risk premia for the G9 currencies and find that they are negative, significant, both statistically and economically, and time varying. Our analysis indicates that the currency volatility risk premia covary with other prominent risk premia that have attracted attention in the asset pricing literature, namely the FX carry and the equity risk premium as well as the variance risk premia in other asset classes. However, once the equity variance risk premium is entered in a multiple regression, the statistical and economic significance of the former two is substantially impaired. We interpret these findings as evidence that volatility acts as an aggregate state variable that captures the evolution of the investor's opportunity set rather than just another statistical risk factor. Finally, we find no conclusive evidence that jump risk is priced within the volatility risk premia supporting the view that stochastic volatility and jumps have different effects and are separately priced.
Author: Nicole Branger
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
The paper analyzes expected option returns in models with stochastic volatility and jumps. A comparison with empirically documented returns shows that the ability of the model to explain these returns can differ significantly depending on the holding period and depending on whether we consider call or put options. Furthermore, we show that the size of the jump risk premium and its decomposition into a premium for jump intensity risk, jump size risk, and jump variance risk has a significant impact on expected option returns. In particular, expected returns on OTM calls can even become negative if e.g. jump variance risk is priced.
Author: Jian Chen
Publisher: Springer
ISBN: 9811074283
Category : Business & Economics
Languages : en
Pages : 163
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Book Description
This book mainly addresses the general equilibrium asset pricing method in two aspects: option pricing and variance risk premium. First, volatility smile and smirk is the famous puzzle in option pricing. Different from no arbitrage method, this book applies the general equilibrium approach in explaining the puzzle. In the presence of jump, investors impose more weights on the jump risk than the volatility risk, and as a result, investors require more jump risk premium which generates a pronounced volatility smirk. Second, based on the general equilibrium framework, this book proposes variance risk premium and empirically tests its predictive power for international stock market returns.
Author: Mohamed El Hedi Arouri
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Book Description
We decompose the non-diversifiable market risk into continuous and discontinuous components and jump systematic risks into positive vs. negative and small vs. large components. We examine their association with equity risk premia across major equity markets. We show that developed markets jumps are more closely linked to the aggregate market index than emerging and frontier ones. The reward for bearing both the continuous and downside jump risks is positive during the pre-crisis period whereas the reward for bearing the upside and large jump risks is negative during the crisis and post-crisis periods. We also provide evidence of significant continuous and discontinuous leverage effects during the pre-crisis period, suggesting that both continuous and discontinuous price and volatility risks share compensations for common underlying risk factors.
