SSRN Author: Kris JacobsKris Jacobs SSRN Content
https://www.ssrn.com/author=279697
https://www.ssrn.com/rss/en-usSat, 23 Apr 2022 01:14:22 GMTeditor@ssrn.com (Editor)Sat, 23 Apr 2022 01:14:22 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0REVISION: Exploring Risk Premia, Pricing Kernels, and No-Arbitrage Restrictions in Option Pricing ModelsThe literature on dynamic option valuation typically does not explicitly specify a pricing kernel. Instead it characterizes the kernel indirectly by specifying prices of risk, or defines it implicitly as the ratio of the risk-neutral and physical probabilities. We propose explicit pricing kernels for stochastic volatility option pricing models that satisfy absence of arbitrage. Different affine price-of-risk specifications correspond to pricing kernels with radically different, and sometimes implausible, economic implications. It can be difficult to statistically distinguish between pricing kernels with widely different economic implications and risk premia. We attribute this to the inherent statistical problem with the estimation of the equity and variance risk premia. This finding extends Merton's (1980) observations on the estimation of the market equity premium to joint estimation of the equity and variance risk premia using the cross-section of options and the underlying returns.
https://www.ssrn.com/abstract=3997905
https://www.ssrn.com/2130813.htmlFri, 22 Apr 2022 14:42:56 GMTREVISION: Exploring Risk Premia, Pricing Kernels, and No-Arbitrage Restrictions in Option Pricing ModelsThe literature on dynamic option valuation typically does not explicitly specify a pricing kernel. Instead it characterizes the kernel indirectly by specifying prices of risk, or defines it implicitly as the ratio of the risk-neutral and physical probabilities. We propose explicit pricing kernels for stochastic volatility option pricing models that satisfy absence of arbitrage. Different affine price-of-risk specifications correspond to pricing kernels with radically different, and sometimes implausible, economic implications. It can be difficult to statistically distinguish between pricing kernels with widely different economic implications and risk premia. We attribute this to the inherent statistical problem with the estimation of the equity and variance risk premia. This finding extends Merton's (1980) observations on the estimation of the market equity premium to joint estimation of the equity and variance risk premia using the cross-section of options and the underlying returns.
https://www.ssrn.com/abstract=3997905
https://www.ssrn.com/2102874.htmlTue, 08 Feb 2022 15:27:40 GMTREVISION: Modeling Conditional Factor Risk Premia Implied by Index Option ReturnsWe propose a novel factor model for option returns. Option exposures are estimated nonparametrically and factor risk premia can vary nonlinearly with states. The model is estimated using regressions, with minimal assumptions on factor and option return dynamics. Using index options, we characterize the conditional risk premia for the market return, market variance, and tail and intermediary risk factors. All average risk premia have the expected sign and meaningful magnitudes. Market and variance risk premia display pronounced time-variation, spike during crises, and always have the expected sign. Combined, market return and variance explain more than 90% of option return variation.
https://www.ssrn.com/abstract=3893807
https://www.ssrn.com/2080719.htmlTue, 30 Nov 2021 14:26:03 GMTREVISION: Modeling Conditional Factor Risk Premia Implied by Index Option ReturnsWe propose a novel factor model for option returns. Option exposures are estimated nonparametrically and factor risk premia can vary nonlinearly with states. The model is estimated using regressions, with minimal assumptions on factor and option return dynamics. Using index options, we characterize the conditional risk premia for the market return, market variance, and tail and intermediary risk factors. All average risk premia have the expected sign and meaningful magnitudes. Market and variance risk premia display pronounced time-variation, spike during crises, and always have the expected sign. Combined, market return and variance explain more than 90% of option return variation.
https://www.ssrn.com/abstract=3893807
https://www.ssrn.com/2069148.htmlMon, 18 Oct 2021 16:01:25 GMTREVISION: Modeling Conditional Factor Risk Premia Implied by Index Option ReturnsWe propose a novel factor model for option returns. Option exposures are estimated nonparametrically and factor risk premia can vary nonlinearly with states. The model is estimated using regressions, with minimal assumptions on factor and option return dynamics. Using index options, we characterize the conditional risk premia for the market return, market variance, and tail and intermediary risk factors. All average risk premia have the expected sign and meaningful magnitudes. Market and variance risk premia display pronounced time-variation, spike during crises, and always have the expected sign. Combined, market return and variance explain more than 90% of option return variation.
https://www.ssrn.com/abstract=3893807
https://www.ssrn.com/2058819.htmlFri, 10 Sep 2021 11:39:39 GMTREVISION: Characterizing the Variance Risk Premium: The Role of the Leverage EffectThe conditional covariance between the market return and its variance, which we refer to as the leverage effect, is positively related to the variance risk premium. It contains incremental information about the variance risk premium after controlling for other return moments and additional variables suggested by the literature as determinants of the variance risk premium. This empirical finding is supported by theory: the pricing of volatility risk is the economic channel behind the strong positive relation between the two variables. We use this relation to construct a time series of the variance risk premium dating back to 1926.
https://www.ssrn.com/abstract=3227211
https://www.ssrn.com/2058417.htmlThu, 09 Sep 2021 00:37:03 GMTREVISION: Modeling Conditional Factor Risk Premia Implied by Index Option ReturnsWe propose a novel factor model for option returns. Option exposures are estimated nonparametrically and factor risk premia can vary nonlinearly with states. The model is estimated using regressions, with minimal assumptions on factor and option return dynamics. Using index options, we characterize the conditional risk premia for the market return, market variance, and tail and intermediary risk factors. All average risk premia have the expected sign and meaningful magnitudes. Market and variance risk premia display pronounced time-variation, spike during crises, and always have the expected sign. Combined, market return and variance explain more than 90% of option return variation.
https://www.ssrn.com/abstract=3893807
https://www.ssrn.com/2056691.htmlThu, 02 Sep 2021 14:56:25 GMTREVISION: Characterizing the Variance Risk Premium: The Role of the Leverage EffectThe conditional covariance between the market return and its variance, which we refer to as the leverage effect, is positively related to the variance risk premium. It contains incremental information about the variance risk premium after controlling for other return moments and additional variables suggested by the literature as determinants of the variance risk premium. This empirical finding is supported by theory: the pricing of volatility risk is the economic channel behind the strong positive relation between the two variables. We use this relation to construct a time series of the variance risk premium dating back to 1926.
https://www.ssrn.com/abstract=3227211
https://www.ssrn.com/2042084.htmlTue, 13 Jul 2021 09:55:21 GMT