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On the Nature of Jump Risk Premia

Author

Listed:
  • Piotr Orłowski

    (HEC Montreal)

  • Paul Schneider

    (University of Lugano - Institute of Finance; Swiss Finance Institute)

  • Fabio Trojani

    (Swiss Finance Institute; University of Geneva)

Abstract

We shed light on the nature of jump risk compensation by studying the profits from a trading strategy that bets on the high-frequency jump skew of S&P 500 returns. Earlier evidence suggests the jump risk premium is large and positive. We find it to be concentrated in periods when the index option market is closed, and investors cannot trade options. Whenever jump skew can be traded continuously, the premium vanishes. We conclude the jump skew premium in index options is not compensation for the risk of occasional, large returns, but for the investors’ inability to adjust their nonlinear risk exposure.

Suggested Citation

  • Piotr Orłowski & Paul Schneider & Fabio Trojani, 2019. "On the Nature of Jump Risk Premia," Swiss Finance Institute Research Paper Series 19-31, Swiss Finance Institute, revised Jun 2019.
    • Handle: RePEc:chf:rpseri:rp1931
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3391998
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    Cited by:

    1. Bollerslev, Tim & Patton, Andrew J. & Quaedvlieg, Rogier, 2022. "Realized semibetas: Disentangling “good” and “bad” downside risks," Journal of Financial Economics, Elsevier, vol. 144(1), pages 227-246.

    More about this item

    Keywords

    rare events; jump risk premium; options; high-frequency data;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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