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The jump leverage risk premium

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  • Bollerslev, Tim
  • Todorov, Viktor

Abstract

Jumps in asset prices are ubiquitous, yet the apparent high price of jump risk observed empirically is commonly viewed as puzzling. We develop new model-free short-time risk-neutral variance expansions, allowing us to clearly delineate the importance of jumps in generating both price and variance risks. We find that simultaneous jumps in the price and the stochastic volatility and/or jump intensity of the market commands a sizeable risk premium. The existence of “jump leverage” risk premium may be rationalized in the context of equilibrium-based models by jumps in the conditional moments of the underlying fundamentals and/or changes in investors' risk aversion.

Suggested Citation

  • Bollerslev, Tim & Todorov, Viktor, 2023. "The jump leverage risk premium," Journal of Financial Economics, Elsevier, vol. 150(3).
    • Handle: RePEc:eee:jfinec:v:150:y:2023:i:3:s0304405x23001630
    DOI: 10.1016/j.jfineco.2023.103723
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    More about this item

    Keywords

    Jumps; Options; Tail risk; Leverage effect; Risk premiums; VIX index;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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