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Volatility and jump risk in option returns
Author(s) -
Guo Biao,
Lin Hai
Publication year - 2020
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22107
Subject(s) - volatility (finance) , jump , economics , volatility risk premium , econometrics , volatility risk , implied volatility , forward volatility , stochastic volatility , financial economics , volatility smile , physics , quantum mechanics
We examine the importance of volatility and jump risk in the time‐series prediction of S&P 500 index option returns. The empirical analysis provides a different result between call and put option returns. Both volatility and jump risk are important predictors of put option returns. In contrast, only volatility risk is consistently significant in the prediction of call option returns over the sample period. The empirical results support the theory that there is option risk premium associated with volatility and jump risk, and reflect the asymmetry property of S&P 500 index distribution.