Expected Option Returns and the Structure of Jump Risk Premia

40 Pages Posted: 18 Mar 2009  

Nicole Branger

University of Muenster - Finance Center Muenster

Alexandra Hansis

Goethe University Frankfurt - House of Finance

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Multiple version iconThere are 2 versions of this paper

Date Written: February 20, 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 20, 2009). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1361739 or http://dx.doi.org/10.2139/ssrn.1361739

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)
+49 69 798 33901 (Fax)

Paper statistics

Downloads
120
Rank
83,980
Abstract Views
830