Cashing in on Fear: Implied Jump Risk Premium and the Cross-Section of Option Returns
31 Pages Posted: 22 Jun 2011
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: Suggested Citation
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