Jump and Volatility Risk and Risk Premia: A New Model and Lessons from S&P 500 Options

49 Pages Posted: 21 Mar 2005

See all articles by Pedro Santa-Clara

Pedro Santa-Clara

New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Shu Yan

Oklahoma State University - Stillwater - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 2004

Abstract

We use a novel pricing model to filter times series of diffusive volatility and jump intensity from S&P 500 index options. These two measures capture the ex-ante risk assessed by investors. We find that both components of risk vary substantially over time, are quite persistent, and correlate with each other and with the stock index. Using a simple general equilibrium model with a representative investor, we translate the filtered measures of ex-ante risk into an ex-ante risk premium. We find that the average premium that compensates the investor for the risks implicit in option prices, 10.1 percent, is about twice the premium required to compensate the same investor for the realized volatility, 5.8 percent. Moreover, the ex-ante equity premium that we uncover is highly volatile, with values between 2 and 32 percent. The component of the premium that corresponds to the jump risk varies between 0 and 12 percent.

Suggested Citation

Santa-Clara, Pedro and Yan, Shu, Jump and Volatility Risk and Risk Premia: A New Model and Lessons from S&P 500 Options (November 2004). Available at SSRN: https://ssrn.com/abstract=690021 or http://dx.doi.org/10.2139/ssrn.690021

Pedro Santa-Clara (Contact Author)

New University of Lisbon - Nova School of Business and Economics ( email )

Lisbon
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~psc/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Shu Yan

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
146
Abstract Views
1,111
rank
162,084
PlumX Metrics