Cashing in on Fear: Implied Jump Risk Premium and the Cross-Section of Option Returns

31 Pages Posted: 22 Jun 2011

See all articles by Mishuk Chowdhury

Mishuk Chowdhury

University of Texas at Arlington

Peter P. Lung

University of Texas at Arlington

John David Diltz

Central Michigan University - Department of Finance and Law; University of Texas at Arlington

Date Written: June 20, 2011

Abstract

This paper examines the relationship between asset jump risk premium and the cross section of option returns. Empirically, we estimate jump risk premium from two different measures of the slope of the implied volatility smile. Our results show that options written on the stocks with high jump risk premium outperform options written on stocks with the low jump risk premiums.

Keywords: fear, jump risk, option returns

Suggested Citation

Chowdhury, Mishuk and Lung, Peter P. and Diltz, John David, Cashing in on Fear: Implied Jump Risk Premium and the Cross-Section of Option Returns (June 20, 2011). Available at SSRN: https://ssrn.com/abstract=1868605 or http://dx.doi.org/10.2139/ssrn.1868605

Mishuk Chowdhury (Contact Author)

University of Texas at Arlington ( email )

Department of Finance and Real estate
UTA Box 19449
Arlington, TX
United States

Peter P. Lung

University of Texas at Arlington ( email )

415 S West St Apt no 205
Arlington, TX 76019
United States

John David Diltz

Central Michigan University - Department of Finance and Law ( email )

Mount Pleasant, MI 48859
United States

University of Texas at Arlington ( email )

Box 19449
Arlington, TX 76013
United States
817-272-3837 (Phone)

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