Divergence and the Price of Uncertainty

Paul Schneider () and Fabio Trojani ()

No 15-60, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Realized divergence gauges the distinct realized moments associated with time-varying uncertainty and is tradeable with divergence swaps engineered from delta-hedged option portfolios. Consistently with established notions of symmetry in arbitrage-free option markets, implied divergence systematically decomposes the price of uncertainty into the contributions of distinct implied moments. Empirically, implied market divergence and market divergence premia vary substantially, in the time series, in the cross-section and in dependence of the investment horizon, making the shortcomings of a model easily visible.

Keywords: divergence; risk premia; information theory; dispersion; options (search for similar items in EconPapers)
JEL-codes: C02 C23 C44 C52 C61 D81 G11 G12 (search for similar items in EconPapers)
Pages: 90 pages
Date: 2015-11
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1560

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