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

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