On the Nature of Jump Risk Premia
74 Pages Posted: 6 Jun 2019 Last revised: 5 Mar 2020
Date Written: January 28, 2020
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: Suggested Citation