Jump and Volatility Risk and Risk Premia: A New Model and Lessons from S&P 500 Options

Pedro Santa-Clara and Shu Yan

No 10912, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use a novel pricing model to filter times series of diffusive volatility and jump intensity from S&P 500 index options. These two measures capture the ex-ante risk assessed by investors. We find that both components of risk vary substantially over time, are quite persistent, and correlate with each other and with the stock index. Using a simple general equilibrium model with a representative investor, we translate the filtered measures of ex-ante risk into an ex-ante risk premium. We find that the average premium that compensates the investor for the risks implicit in option prices, 10.1 percent, is about twice the premium required to compensate the same investor for the realized volatility, 5.8 percent. Moreover, the ex-ante equity premium that we uncover is highly volatile, with values between 2 and 32 percent. The component of the premium that corresponds to the jump risk varies between 0 and 12 percent.

JEL-codes: G1 (search for similar items in EconPapers)
Date: 2004-11
New Economics Papers: this item is included in nep-cfn and nep-fin
Note: AP
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Citations: View citations in EconPapers (20)

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Working Paper: Jump and Volatility Risk and Risk Premia: A New Model and Lessons from S&P 500 Options (2004)
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