On the Nature of Jump Risk Premia

74 Pages Posted: 6 Jun 2019 Last revised: 5 Mar 2020

See all articles by Piotr Orłowski

Piotr Orłowski

HEC Montréal

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Fabio Trojani

Swiss Finance Institute; University of Geneva

Date Written: January 28, 2020

Abstract

The dynamics and timing of a market crash could determine its price of risk. We develop model-free trading strategies that allow for payoffs specific to when a crash occurs and how it unfolds, and thus enable the study of the fluctuations of different market crash risk premiums. We find that investors in the S\&P 500 index option market require high premiums for overnight crashes and low premiums for daytime crashes. Furthermore, in daytime crashes, investors do not discriminate between jump and Brownian risks. Finally, daytime crash risk profits are explained by standard risk factors, while overnight profits are not.

Keywords: market crashes, jump risk premium, options, high-frequency data

JEL Classification: G10, G12, C58

Suggested Citation

Orłowski, Piotr and Schneider, Paul Georg and Trojani, Fabio, On the Nature of Jump Risk Premia (January 28, 2020). Swiss Finance Institute Research Paper No. 19-31. Available at SSRN: https://ssrn.com/abstract=3391998 or http://dx.doi.org/10.2139/ssrn.3391998

Piotr Orłowski (Contact Author)

HEC Montréal ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Paul Georg Schneider

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, Geneva
Switzerland

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