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Negative Market Volatility Risk Premium: Evidence from the LIFFE Equity Index Options*

Negative Market Volatility Risk Premium: Evidence from the LIFFE Equity Index Options* We provide non‐parametric empirical evidence regarding negative volatility risk premium using LIFFE equity index options. In addition, we incorporate the moment‐adjusted option delta hedge ratio to mitigate the effect of model misspecification. From the results, we observe several interesting phenomena. First, the delta‐hedged gains are negative. Second, with a correction for model misspecification, higher‐order moments measures show less significance and the volatility risk premium still plays a key role in affecting delta‐hedged gains. All empirical evidence supports the existence of negative volatility risk premium in LIFFE equity index options. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Journal of Financial Studies Wiley

Negative Market Volatility Risk Premium: Evidence from the LIFFE Equity Index Options*

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Publisher
Wiley
Copyright
Copyright © 2009 Wiley Subscription Services
ISSN
1226-1165
eISSN
2041-6156
DOI
10.1111/j.2041-6156.2009.tb00030.x
Publisher site
See Article on Publisher Site

Abstract

We provide non‐parametric empirical evidence regarding negative volatility risk premium using LIFFE equity index options. In addition, we incorporate the moment‐adjusted option delta hedge ratio to mitigate the effect of model misspecification. From the results, we observe several interesting phenomena. First, the delta‐hedged gains are negative. Second, with a correction for model misspecification, higher‐order moments measures show less significance and the volatility risk premium still plays a key role in affecting delta‐hedged gains. All empirical evidence supports the existence of negative volatility risk premium in LIFFE equity index options.

Journal

Asia-Pacific Journal of Financial Studies – Wiley

Published: Jan 1, 2009

Keywords: ; ; ; ;

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