Implied risk aversion and volatility risk premiums
AbstractSince investor risk aversion determines the premium required for bearing risk, a comparison thereof provides evidence of the different structure of risk premium across markets. This article estimates and compares the degree of risk aversion of three actively traded options markets: the S&P 500, Nikkei 225 and KOSPI 200 options markets. The estimated risk aversions is found to follow S&P 500, Nikkei 225 and KOSPI 200 options in descending order, implying that S&P 500 investors require more compensation than other investors for bearing the same risk. To prove this empirically, we examine the effect of risk aversion on volatility risk premium, using delta-hedged gains. Since more risk-averse investors are willing to pay higher premiums for bearing volatility risk, greater risk averseness can result in a severe negative volatility risk premium, which is usually understood as hedging demands against the underlying asset's downward movement. Our findings support the argument that S&P 500 investors with higher risk aversion pay more premiums for hedging volatility risk.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor and Francis Journals in its journal Applied Financial Economics.
Volume (Year): 22 (2012)
Issue (Month): 1 (January)
Contact details of provider:
Web page: http://www.tandf.co.uk/journals/routledge/09603107.html
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.