Consumption risks in option returns

Shuwen Yang, Kevin Aretz, Hening Liu and Yuzhao Zhang

Journal of Empirical Finance, 2022, vol. 69, issue C, 285-302

Abstract: We offer evidence that exposures to consumption growth and consumption volatility are significantly priced in the cross-section of delta-hedged option returns. Consumption growth commands a positive risk premium, whereas consumption volatility commands a negative risk premium. Our results suggest that consumption risk exposures provide rational foundations for well-known relations between options moneyness or idiosyncratic underlying-stock volatility and the cross-section of delta-hedged option returns. Furthermore, those risk premiums can also price stocks. In a representative-agent economy with recursive preferences, our results suggest that investors prefer early resolution of uncertainty.

Keywords: Consumption growth; Option returns; Recursive utility; Volatility risk (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:69:y:2022:i:c:p:285-302

DOI: 10.1016/j.jempfin.2022.10.001

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