Jump and variance risk premia in the S&P 500

Neumann, Maximilian, Prokopczuk, Marcel and Simen, Chardin Wese (2016) Jump and variance risk premia in the S&P 500. JOURNAL OF BANKING & FINANCE, 69 (C). pp. 72-83.

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Abstract

We analyze the risk premia embedded in the S&P 500 spot index and option markets. We use a long time-series of spot prices and a large panel of option prices to jointly estimate the diffusive stock risk premium, the price jump risk premium, the diffusive variance risk premium and the variance jump risk premium. The risk premia are statistically and economically significant and move over time. Investigating the economic drivers of the risk premia, we are able to explain up to 63% of these variations.

Item Type:	Article
Additional Information:	In this paper, we analyze the jump and variance risk premia embedded in the S&P 500 market. We use a long time-series of spot prices and a large panel of option prices for the period 1990�2010 to jointly estimate diffusive variance risk premia, price jump risk premia and variance jump risk premia. We find that these risk premia are statistically and economically significant. The risk premia are highly time-varying and co-move strongly, indicating the presence of a factor structure in the market prices of risk. Motivated by this result, we investigate the economic drivers of the three risk premia. We are able to explain up to 63% of variations in risk premia. Interestingly, our analysis reveals that proxies of macroeconomic uncertainty capture more variations in the risk premia than those of macroeconomic expectations.## TULIP Type: Articles/Papers (Journal) ##
Uncontrolled Keywords:	Equity risk premium, Jump risk premium, Variance risk premium, S&P 500, Options, Markov Chain Monte Carlo
Depositing User:	Symplectic Admin
Date Deposited:	21 Aug 2019 07:42
Last Modified:	19 Jan 2023 00:28
DOI:	10.1016/j.jbankfin.2016.03.013
Related URLs:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3052276