NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Pedro Santa-Clara, Shu Yan

NBER Working Paper No. 10912
Issued in November 2004
NBER Program(s):   AP

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.

download in pdf format
   (318 K)

email paper

This paper is available as PDF (318 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10912

Users who downloaded this paper also downloaded these:
Dumas, Kurshev, and Uppal w13401 Equilibrium Portfolio Strategies in the Presence of Sentiment Risk and Excess Volatility
Backus, Chernov, and Martin w15240 Disasters implied by equity index options
Bates w4596 Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in thePHLX Deutschemark Options
Collin-Dufresne, Goldstein, and Yang w15734 On the Relative Pricing of long Maturity S&P 500 Index Options and CDX Tranches
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us