Risk premia in option markets

Dilip B. Madan ()
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Dilip B. Madan: University of Maryland

Annals of Finance, 2016, vol. 12, issue 1, No 5, 94 pages

Abstract: Abstract Risk premia are related to price probability ratios or for continuous time pure jump processes the ratios of jump arrival rates under the pricing and physical measures. The variance gamma model is employed to synthesize densities with risk premia seen as the ratio of the three parameters. The premia are shown to be mean reverting, predictable, focused on crashes at shorter horizons and rallies at the longer horizon. Predicted premia may be used to adjust physical parameters to develop option prices based on time series data.

Keywords: Variance gamma; Self decomposable law; Vector auto regression; Long horizon returns (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10436-016-0273-9

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