Volatility-Decay Risk Premia

The Journal of Derivatives, Forthcoming, 2014

https://doi.org/10.3905/jod.2014.22.1.057

Posted: 20 May 2019

See all articles by Dan Galai

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Haim Kedar-Levy

Ben Gurion University of the Negev - Guilford Glazer Faculty of Business and Management

Ben Z. Schreiber

Bank of Israel; Bar Ilan University

Date Written: December 22, 2013

Abstract

We estimate post-jump volatility-decay risk premia as the predictable ‎difference between periods of high and low diffusive volatility. By ‎constructing straddle portfolios after positive and negative jumps occur, we ‎show that the gains that these hedged options' portfolios yield compensate ‎investors for the uncertain magnitude and duration of volatility decay, as well ‎as for vega exposure. This paper adds to the literature by distinguishing ‎between the premia after positive versus negative jumps, and by exploring ‎premia patterns over time. In particular, we find that GARCH(1,1) is an ‎inefficient identifier of jumps, and show that Hampel [1971] is a superior ‎procedure. ‎

Keywords: Volatility risk premium, Jump risk premium, Options strategies, Gamma hedging ‎

JEL Classification: G10, G13, G14‎

Suggested Citation

Galai, Dan and Kedar-Levy, Haim and Schreiber, Ben Z., Volatility-Decay Risk Premia (December 22, 2013). The Journal of Derivatives, Forthcoming, 2014. Available at SSRN: https://ssrn.com/abstract=2089435 or http://dx.doi.org/10.2139/ssrn.2089435

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
972 2 5883235 (Phone)
972 2 5881341 (Fax)

Haim Kedar-Levy (Contact Author)

Ben Gurion University of the Negev - Guilford Glazer Faculty of Business and Management ( email )

P.O. Box 653
Beer-Sheva 84105
Israel
(972) 8 6472569 (Phone)
(972) 8 6477697 (Fax)

Ben Z. Schreiber

Bank of Israel ( email )

P.O. Box 780
Jerusalem 91007
Israel
972-2-6552595 (Phone)
972-2-6512026 (Fax)

Bar Ilan University ( email )

Ramat Gan, 55000
Israel

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