"Up" and "Down" Levy Jumps and Market Risk Premia Implications from S&P500 Options
57 Pages Posted: 5 May 2020 Last revised: 6 May 2020
Date Written: April 10, 2020
We model the S&P500 index options dynamics using the CGMY distribution, with independent "up" and "down" return jumps, and diffusive jump intensities. Allowing the up and down parts to be separately parameterised accounts for the dynamic smirk effect, without correlation between returns and intensities. We filter the up and down intensity factors and associated options risk premia. Both factors are informative for dynamic risk premia of equity and corporate debt. We argue that the former is a liquidity effect, and the latter an equilibrium effect. The magnitudes of the estimated, dynamic equity premia are consistent with the "equity premium puzzle".
Keywords: Levy Jumps, Leverage Effect, Risk Premia, Market Liquidity, Return Predictability
JEL Classification: G10, G12, G13
Suggested Citation: Suggested Citation