40 Pages Posted: 18 Mar 2009
Date Written: February 20, 2009
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: Suggested Citation
Branger, Nicole and Hansis, Alexandra and Schlag, Christian, Expected Option Returns and the Structure of Jump Risk Premia (February 20, 2009). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1361739 or http://dx.doi.org/10.2139/ssrn.1361739