Divergence and the Price of Uncertainty

90 Pages Posted: 25 Nov 2015

See all articles by Paul Schneider

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Fabio Trojani

Swiss Finance Institute; University of Geneva

Date Written: November 23, 2015

Abstract

Realized divergence gauges the distinct realized moments associated with time-varying uncertainty and is tradeable with divergence swaps engineered from delta-hedged option portfolios. Consistently with established notions of symmetry in arbitrage-free option markets, implied divergence systematically decomposes the price of uncertainty into the contributions of distinct implied moments. Empirically, implied market divergence and market divergence premia vary substantially, in the time series, in the cross-section and in dependence of the investment horizon, making the shortcomings of a model easily visible.

Keywords: divergence, risk premia, information theory, dispersion, options

JEL Classification: C02, C23, C44, C52, C61, D81, G11, G12

Suggested Citation

Schneider, Paul Georg and Trojani, Fabio, Divergence and the Price of Uncertainty (November 23, 2015). Swiss Finance Institute Research Paper No. 15-60. Available at SSRN: https://ssrn.com/abstract=2694825 or http://dx.doi.org/10.2139/ssrn.2694825

Paul Georg Schneider (Contact Author)

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva
Switzerland

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