Option-Implied Spreads and Option Risk Premia

Christopher L. Culp, Mihir Gandhi (), Yoshio Nozawa and Pietro Veronesi

No 28941, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose implied spreads (IS) and normalized implied spreads (NIS) as simple measures to characterize option prices. IS is the credit spread of an option’s implied bond, the portfolio long a risk-free bond and short a put option. NIS normalizes IS by the risk-neutral default probability and reflects tail risk. IS and NIS are countercyclical and predict implied bond returns, while neither, like implied volatility, predicts put returns. These opposite predictability results are consistent with a stochastic volatility, stochastic jump intensity model, as put premia increase in volatility but decrease in jump intensity, while implied bond premia increase in both.

JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-fmk, nep-ore and nep-rmg
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