 Hedging macroeconomic and financial uncertainty and volatilityIan Dew-Becker, Stefano Giglio and Bryan Kelly Journal of Financial Economics, 2021, vol. 142, issue 1, 23-45 Abstract: We study the pricing of shocks to uncertainty and volatility using a wide-ranging set of options contracts covering a variety of different markets. If uncertainty shocks are viewed as bad by investors, they should carry negative risk premiums. Empirically, however, uncertainty risk premiums are positive in most markets. Instead, it is the realization of large shocks to fundamentals that has historically carried a negative premium. In other words, we find that the return premium for gamma is negative, while that for vega is positive. These results imply that it is jumps, for which exposure is measured by gamma, not forward-looking uncertainty shocks, measured by vega, that drive investors’ marginal utility. In further support of the jump interpretation, the return patterns are more extreme for deeper out-of-the-money options. JEL-codes: C33 D83 G12 G13 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:1:p:23-45 DOI: 10.1016/j.jfineco.2021.05.053 Access Statistics for this article Journal of Financial Economics is currently edited by G. William Schwert More articles in Journal of Financial Economics from Elsevier |
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