Volatility risk premium decomposition of LIFFE equity options

Bing-Huei Lin, Yueh-Neng Lin and Yin-Jung Chen

International Review of Economics & Finance, 2012, vol. 24, issue C, 315-326

Abstract: This study extends Bakshi and Kapadia's (2003b) framework to a multi-factor model to verify the common macro-factors attributed to the price of volatility risk in U.K. equity options. The results point out the presence of a negative risk premium and indicate that both idiosyncratic volatility and macro-factor volatilities arising from shocks to an index of industrial production and unanticipated inflation are priced in the individual LIFFE equity options. The evidence suggests that option investors are willing to pay for hedging against the shocks to those macro-factors and idiosyncratic risk.

Keywords: Macro-factors; Volatility risk premium; Idiosyncratic volatility risk; Delta-neutral portfolio; Moment-adjusted option pricing formula (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:24:y:2012:i:c:p:315-326

DOI: 10.1016/j.iref.2012.04.002

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