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The Risk Premia Embedded in Index Options, Journal of Financial Economics

Abstract

We study the dynamic relation between market risks and risk premia using time series of index option surfaces. We find that priced left tail risk cannot be spanned by market volatility (and its components) and introduce a new tail factor. This tail factor has no incremental predictive power for future volatility and jump risks, beyond current and past volatility, but is critical in predicting future market equity and variance risk premia. Our findings suggest a wide wedge between the dynamics of market risks and their compensation, with the latter typically displaying a far more persistent reaction following market crises.

Type

Article

Author(s)

Torben Andersen, Nicola Fusari, Viktor Todorov

Date Published

2015

Citations

Andersen, Torben, Nicola Fusari, and Viktor Todorov. 2015. The Risk Premia Embedded in Index Options. Journal of Financial Economics. 117(3): 558-584.

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