Jump and Variance Risk Premia in the S&P 500

39 Pages Posted: 2 Jul 2014 Last revised: 2 Apr 2016

Maximilian Neumann

Technische Universität München (TUM)

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Chardin Wese Simen

University of Reading - ICMA Centre

Date Written: July 1, 2014

Abstract

We analyze the risk premia embedded in the S&P 500 spot index and option markets. We use a long time-series of spot prices and a large panel of option prices to jointly estimate the diffusive stock risk premium, the Price jump risk premium, the diffusive variance risk premium and the variance jump risk premium. The risk premia are statistically and economically significant and move over time. Investigating the economic drivers of the risk premia, we are able to explain up to 63% of these variations.

Keywords: Jump risk premia, Variance risk premia, S&P 500, Options, Markov Chain Monte Carlo

JEL Classification: G12, G13

Suggested Citation

Neumann, Maximilian and Prokopczuk, Marcel and Wese Simen, Chardin, Jump and Variance Risk Premia in the S&P 500 (July 1, 2014). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2461282 or http://dx.doi.org/10.2139/ssrn.2461282

Maximilian Neumann

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, 80333
Germany

Marcel Prokopczuk (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Chardin Wese Simen

University of Reading - ICMA Centre ( email )

Henley Business School
University of Reading
Reading, RG6 6BA
United Kingdom

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