"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

See all articles by Andrew P. Carverhill

Andrew P. Carverhill

City University of Hong Kong

Dan Luo

School of Finance, Shanghai University of Finance and Economics

Date Written: April 10, 2020

Abstract

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

Carverhill, Andrew Peter and Luo, Dan, "Up" and "Down" Levy Jumps and Market Risk Premia Implications from S&P500 Options (April 10, 2020). Available at SSRN: https://ssrn.com/abstract=3572375 or http://dx.doi.org/10.2139/ssrn.3572375

Andrew Peter Carverhill

City University of Hong Kong ( email )

Department of Economics and Finance
Tat Chee Avenue, Kowloon Tong
Hong Kong, Hong Kong SAR 000000
China
+852 3442 9247 (Phone)

Dan Luo (Contact Author)

School of Finance, Shanghai University of Finance and Economics ( email )

Shanghai, 200433
China
+86-21-65904920 (Phone)

HOME PAGE: http://sof.shufe.edu.cn/80/46/c6894a98374/page.htm

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