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On the Nature of Jump Risk Premia

Piotr Orłowski, Paul Schneider and Fabio Trojani
Additional contact information
Piotr Orłowski: HEC Montreal
Paul Schneider: University of Lugano - Institute of Finance; Swiss Finance Institute
Fabio Trojani: Swiss Finance Institute; University of Geneva

No 19-31, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We shed light on the nature of jump risk compensation by studying the profits from a trading strategy that bets on the high-frequency jump skew of S&P 500 returns. Earlier evidence suggests the jump risk premium is large and positive. We find it to be concentrated in periods when the index option market is closed, and investors cannot trade options. Whenever jump skew can be traded continuously, the premium vanishes. We conclude the jump skew premium in index options is not compensation for the risk of occasional, large returns, but for the investors’ inability to adjust their nonlinear risk exposure.

Keywords: rare events; jump risk premium; options; high-frequency data (search for similar items in EconPapers)
JEL-codes: C58 G10 G12 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2019-06, Revised 2019-06
New Economics Papers: this item is included in nep-fmk, nep-mst, nep-rmg and nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1931

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