Option-Implied Spreads and Option Risk Premia / Christopher L. Culp, Mihir Gandhi, Yoshio Nozawa, Pietro Veronesi.

Format:

Book

Author/Creator:

Culp, Christopher L.

Contributor:

National Bureau of Economic Research.

Gandhi, Mihir.

Nozawa, Yoshio.

Veronesi, Pietro.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28941.

NBER working paper series no. w28941

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

We propose implied spreads (IS) and normalized implied spreads (NIS) as simple measures to characterize option prices. IS is the credit spread of an option's implied bond, the portfolio long a risk-free bond and short a put option. NIS normalizes IS by the risk-neutral default probability and reflects tail risk. IS and NIS are countercyclical and predict implied bond returns, while neither, like implied volatility, predicts put returns. These opposite predictability results are consistent with a stochastic volatility, stochastic jump intensity model, as put premia increase in volatility but decrease in jump intensity, while implied bond premia increase in both.

Notes:

Print version record

June 2021.