Jump and Volatility Risk Premia: Empirical Estimations Following Tail Events
Hebrew University of Jerusalem - Jerusalem School of Business Administration
Ben Gurion University of the Negev - Guilford Glazer Faculty of Business and Management; Ono Academic College
Ben Z. Schreiber
Bank of Israel; Ono Academic College
June 22, 2012
We estimate jump risk premia as the difference between average gains that gamma, rather than delta hedging yields, by constructing straddle portfolios after positive and negative jumps occurred. Additionally, we estimate volatility risk premia by employing same strategies on non-jump days. This paper adds to the literature by distinguishing between the premia after positive vs. negative jumps, and by exploring premia patterns over time. While average jump risk premia is 10%, it is asymmetric: 16% after negative but 2% after positive jumps. It starts highest in the short-term and gradually declines. Volatility risk premia range 1.6%-4.1%, depending on hedge quality.
Number of Pages in PDF File: 29
Keywords: Volatility risk premium, Jump risk premium, Options strategies, Gamma hedging
JEL Classification: G10, G13, G14working papers series
Date posted: June 23, 2012
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