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Jump and Volatility Risk Premia: Empirical Estimations Following Tail EventsDan GalaiHebrew University of Jerusalem - Jerusalem School of Business Administration Haim Kedar-LevyBen Gurion University of the Negev - Guilford Glazer Faculty of Business and Management; Ono Academic College Ben Z. SchreiberBank of Israel; Ono Academic College June 22, 2012 Abstract: 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, G14 working papers seriesDate posted: June 23, 2012Suggested CitationContact Information
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