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Divergence and the Price of Uncertainty

Author

Listed:
  • Paul Schneider

    (University of Lugano, EPFL, Swiss Finance Institute, and Boston University)

  • Fabio Trojani

    (University of Geneva; Swiss Finance Institute)

Abstract

Realized divergence gauges the distinct realized moments associated with time-varying uncertainty and is tradeable with divergence swaps engineered from delta-hedged option portfolios. Consistently with established notions of symmetry in arbitrage-free option markets, implied divergence systematically decomposes the price of uncertainty into the contributions of distinct implied moments. Empirically, implied market divergence and market divergence premia vary substantially, in the time series, in the cross-section and in dependence of the investment horizon, making the shortcomings of a model easily visible.

Suggested Citation

  • Paul Schneider & Fabio Trojani, 2015. "Divergence and the Price of Uncertainty," Swiss Finance Institute Research Paper Series 15-60, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1560
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    File URL: http://ssrn.com/abstract=2694825
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    Citations

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    Cited by:

    1. Cui, Zhenyu & Lars Kirkby, J. & Nguyen, Duy, 2017. "A general framework for discretely sampled realized variance derivatives in stochastic volatility models with jumps," European Journal of Operational Research, Elsevier, vol. 262(1), pages 381-400.
    2. Carol Alexander & Johannes Rauch, 2017. "The Aggregation Property and its Applications to Realised Higher Moments," Papers 1709.08188, arXiv.org.
    3. Lorenzo Camponovo & Olivier Scaillet & Fabio Trojani, 2017. "Comment on: Nonparametric Tail Risk, Stock Returns, and the Macroeconomy," Journal of Financial Econometrics, Oxford University Press, vol. 15(3), pages 377-387.

    More about this item

    Keywords

    divergence; risk premia; information theory; dispersion; options;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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