Expected Option Returns and the Structure of Jump Risk Premia

39 Pages Posted: 11 Feb 2009

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Alexandra Hansis

Goethe University Frankfurt - House of Finance

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Date Written: February 10, 2009

Abstract

The paper analyzes expected option returns in models with stochastic volatility and jumps. A comparison with empirically documented returns shows that the ability of the model to explain these returns can differ significantly depending on the holding period and depending on whether we consider call or put options. Furthermore, we show that the size of the jump risk premium and its decomposition into a premium for jump intensity risk, jump size risk, and jump variance risk has a significant impact on expected option returns. In particular, expected returns on OTM calls can even become negative if e.g. jump variance risk is priced.

Keywords: Option returns, put puzzle, jump risk premia, volatility risk premium

JEL Classification: G13

Suggested Citation

Branger, Nicole and Hansis, Alexandra and Schlag, Christian, Expected Option Returns and the Structure of Jump Risk Premia (February 10, 2009). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1340575 or http://dx.doi.org/10.2139/ssrn.1340575

Nicole Branger (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Alexandra Hansis

Goethe University Frankfurt - House of Finance ( email )

Campus Westend, Grueneburgplatz 1
Uni-Postfach H 13
Frankfurt, 60323
Germany

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

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