Volatility-Decay Risk Premia
The Journal of Derivatives, Forthcoming, 2014
Posted: 20 May 2019
Date Written: December 22, 2013
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  is a superior procedure.
Keywords: Volatility risk premium, Jump risk premium, Options strategies, Gamma hedging
JEL Classification: G10, G13, G14
Suggested Citation: Suggested Citation