Risk Premia and Lévy Jumps: Theory and Evidence

Hasan Fallahgoul, Julien Hugonnier and Loriano Mancini
Additional contact information
Hasan Fallahgoul: Monash University
Loriano Mancini: USI Lugano - Institute of Finance; Swiss Finance Institute

No 19-49, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: To study jump and volatility risk premia in asset returns, we develop a novel class of time-changed Lévy models. The models are characterized by flexible Lévy measures, and allow consistent estimation under physical and risk neutral measures. To operationalize the models, we introduce a simple and rigorous filtering procedure to recover the unobservable time changes. An extensive time series and option pricing analysis of 16 time-changed Lévy models shows that infinite activity processes carry significant jump risk premia, and largely outperform many finite activity processes.

Keywords: Lévy jumps; time changes; tempered stable law; time series; option pricing (search for similar items in EconPapers)
JEL-codes: C5 G12 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2019-02
New Economics Papers: this item is included in nep-ore and nep-upt
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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3327137 (application/pdf)

Related works:
Journal Article: Risk Premia and Lévy Jumps: Theory and Evidence* (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1949

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