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.
Publication Year: 2019
Publication Date: 2019-01-01
Language: en
Type: article
Access and Citation
Cited By Count: 1
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot