Joint estimation of volatility risk and tail risk premia with time-varying macro-state-dependent property

Sonnan Chen () and Yuchi Gu ()
Additional contact information
Sonnan Chen: Shanghai Jiao Tong University
Yuchi Gu: Shanghai Jiao Tong University

Review of Quantitative Finance and Accounting, 2021, vol. 56, issue 4, No 6, 1357-1397

Abstract: Abstract We propose a new method to jointly estimate volatility risk and two-tail risk price with state-dependent features. Rather than assuming a constant risk price, as in existing models, this new method estimates an extended pricing kernel with macro-state-dependent risk prices. In contrast to the widely accepted constant risk price assumption, we find that the prices for equity, volatility, positive jump, and negative jump risks are strongly dependent on economic conditions. The empirical evidence shows that this new estimation for the macro-state-dependent property adds new pricing information that existing constant risk-price models do not provide. The estimation of macro-state-dependent property has important economic implications for the underlying dynamics and derivative markets. State-dependent risk prices substantially improve the explanation of the dynamic link between the underlying and option markets, and are important factors in the option market. With the out-of-sample test, the new method provides a stable estimation of the risk price dynamics.

Keywords: Pricing kernel; Option market; Jump risk; State-dependent risk price (search for similar items in EconPapers)
JEL-codes: C13 C51 G12 G13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11156-020-00925-6 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:56:y:2021:i:4:d:10.1007_s11156-020-00925-6

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-020-00925-6

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().