Abstract

http://ssrn.com/abstract=2013381
 
 

Citations (1)



 


 



A Tale of Two Option Markets: Pricing Kernels and Volatility Risk


Zhaogang Song


Board of Governors of the Federal Reserve System (FRB)

Dacheng Xiu


University of Chicago - Booth School of Business

January 2014

Fama-Miller Working Paper, Forthcoming
Chicago Booth Research Paper No. 12-10

Abstract:     
Using prices of both S&P 500 options and recently introduced VIX options, we study asset pricing implications of volatility risk. While pointing out the joint pricing kernel is not identified nonparametrically, we propose model-free estimates of marginal pricing kernels of the market return and volatility conditional on the VIX. We find that the pricing kernel of market return exhibits a decreasing pattern given either a high or low VIX level, whereas the unconditional estimates present a U-shape. Hence, stochastic volatility is the key state variable responsible for the U-shape puzzle documented in the literature. Finally, our estimates of the volatility pricing kernel feature a U-shape, implying that investors have high marginal utility in both high and low volatility states.

Number of Pages in PDF File: 34

Keywords: pricing kernel, state-price density, VIX option, volatility risk

JEL Classification: G12, G13

working papers series


Download This Paper

Date posted: March 1, 2012 ; Last revised: February 10, 2014

Suggested Citation

Song, Zhaogang and Xiu, Dacheng, A Tale of Two Option Markets: Pricing Kernels and Volatility Risk (January 2014). Fama-Miller Working Paper, Forthcoming; Chicago Booth Research Paper No. 12-10. Available at SSRN: http://ssrn.com/abstract=2013381 or http://dx.doi.org/10.2139/ssrn.2013381

Contact Information

Zhaogang Song
Board of Governors of the Federal Reserve System (FRB) ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
Dacheng Xiu (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
Feedback to SSRN


Paper statistics
Abstract Views: 1,873
Downloads: 398
Download Rank: 38,571
Citations:  1

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.437 seconds