Jump and Volatility Risk and Risk Premia: A New Model and Lessons from S&P 500 Options / Pedro Santa-Clara, Shu Yan.

Format:

Book

Author/Creator:

Santa-Clara, Pedro.

Contributor:

National Bureau of Economic Research.

Yan, Shu.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10912.

NBER working paper series no. w10912

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Jump and Volatility Risk and Risk Premia

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

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.

Notes:

Print version record

November 2004.