Model Specification and Risk Premia: Evidence from Futures Options

71 Pages Posted: 20 Feb 2004

See all articles by Mark Broadie

Mark Broadie

Columbia University - Columbia Business School - Decision Risk and Operations

Michael S. Johannes

Columbia Business School - Finance and Economics

Mikhail Chernov

UCLA Anderson

Date Written: May 12, 2005

Abstract

This paper examines specification issues and estimates volatility and jump risk premia using the information in the cross-section of S&P futures options from 1987 to 2003. We first test for the presence of jumps in volatility by analyzing the higher moment behavior of option implied variance, and we find strong evidence supporting their presence. Based on cross-sectional fit, we find strong evidence for jumps in prices, and modest evidence for jumps in volatility. Regarding the factor risk premiums, we are not able to identify a statistically significant volatility risk premium, but are able to identify statistically significant, although modest jump risk premiums. The jump risk premiums are economically meaningful as they contribute a significant component to the equity risk premium and can explain observed put returns.

Suggested Citation

Broadie, Mark and Johannes, Michael Slater and Chernov, Mikhail, Model Specification and Risk Premia: Evidence from Futures Options (May 12, 2005). Available at SSRN: https://ssrn.com/abstract=504642 or http://dx.doi.org/10.2139/ssrn.504642

Mark Broadie

Columbia University - Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States
212-854-4103 (Phone)

Michael Slater Johannes

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Mikhail Chernov (Contact Author)

UCLA Anderson ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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