The DOI matches its Crossref record; 24 of the 24 references it cites were found in a registry or an index.
Delta-Hedged Gains and the Negative Market Volatility Risk Premium
Abstract
We investigate whether the volatility risk premium is negative by examining the statistical properties of delta-hedged option portfolios (buy the option and hedge with stock). Within a stochastic volatility framework, we demonstrate a correspondence between the sign and magnitude of the volatility risk premium and the mean delta-hedged portfolio returns. Using a sample of S&P 500 index options, we provide empirical tests that have the following general results. First, the delta-hedged strategy underperforms zero. Second, the documented underperformance is less for options away from the money. Third, the underperformance is greater at times of higher volatility. Fourth, the volatility risk premium significantly affects delta-hedged gains, even after accounting for jump fears. Our evidence is supportive of a negative market volatility risk premium.
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Cites
Large Sample Properties of Generalized Method of Moments Estimators
Hansen, L. P. (1982) · Econometrica · doi:10.2307/1912775 · Cited by 13,467
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Heston, S. L. (1993) · Review of Financial Studies · doi:10.1093/rfs/6.2.327 · Cited by 8,762
Theory of Rational Option Pricing
Merton, R. C. (2019) · World Scientific Reference on Contingent Claims Analysis in Corporate Finance · doi:10.1142/9789814759588_0002 · Cited by 7,948
Theory of rational option pricing
Merton, R. C. (2005) · Theory of Valuation · doi:10.1142/9789812701022_0008 · Cited by 7,161
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Merton, R. C. (1976) · Journal of Financial Economics · doi:10.1016/0304-405x(76)90022-2 · Cited by 5,953
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Empirical Performance of Alternative Option Pricing Models
Bakshi, G., Cao, C., & Chen, Z. (1997) · The Journal of Finance · doi:10.1111/j.1540-6261.1997.tb02749.x · Cited by 2,707
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Cited by
Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?
Bollen, N. P. B., & Whaley, R. E. (2004) · The Journal of Finance · doi:10.1111/j.1540-6261.2004.00647.x · Cited by 987
BOLLERSLEV, T., & TODOROV, V. (2011) · The Journal of Finance · doi:10.1111/j.1540-6261.2011.01695.x · Cited by 804
What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns?
Xing, Y., Zhang, X., & Zhao, R. (2010) · Journal of Financial and Quantitative Analysis · doi:10.1017/s0022109010000220 · Cited by 710
The Price of Correlation Risk: Evidence from Equity Options
DRIESSEN, J., MAENHOUT, P. J., & VILKOV, G. (2009) · The Journal of Finance · doi:10.1111/j.1540-6261.2009.01467.x · Cited by 423
Cross-section of option returns and volatility☆
Goyal, A., & Saretto, A. (2009) · Journal of Financial Economics · doi:10.1016/j.jfineco.2009.01.001 · Cited by 417
Metadata
- Authors
- Bakshi, G., & Kapadia, N.
- Venue
- Review of Financial Studies
- Publisher
- Oxford University Press (OUP)
- Published
- 2003-04
- Volume
- 16
- Issue
- 2
- Pages
- 527-566
- ISSN
- 0893-9454 (ISSN-L)
- 1465-7368
- OpenAlex
- W3123332101
- Cited by
- 933
- References
- 24
- FWCI
- 35.88
- Type
- journal article
- Language
- en
- Open access
- closed
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
