Michael Johannes

Model specification and risk premia: Evidence from futures options

Coauthor(s): Mark Broadie, Mikhail Chernov.

Abstract:
This paper examines model specification issues and estimates diffusive and jump risk premia using S&P futures option prices from 1987 to 2003. We first develop a time series test to detect the presence of jumps in volatility, and find strong evidence in support of their presence. Next, using the cross section of option prices, we find strong evidence for jumps in prices and modest evidence for jumps in volatility based on model fit. The evidence points toward economically and statistically significant jump risk premia, which are important for understanding option returns.

Source: Journal of Finance
Exact Citation:
Broadie, Mark, Mikhail Chernov, and Michael Johannes. "Model specification and risk premia: Evidence from futures options." Journal of Finance 62, no. 3 (2007): 1453-1490.
Volume: 62
Number: 3
Pages: 1453-1490
Date: 2007