Option-Implied Spreads and Option Risk Premia /
Culp, Christopher L.
Option-Implied Spreads and Option Risk Premia / Christopher L. Culp, Mihir Gandhi, Yoshio Nozawa, Pietro Veronesi. - Cambridge, Mass. National Bureau of Economic Research 2021. - 1 online resource: illustrations (black and white); - NBER working paper series no. w28941 . - Working Paper Series (National Bureau of Economic Research) no. w28941. .
June 2021.
We propose implied spreads (IS) and normalized implied spreads (NIS) as simple measures to characterize option prices. IS is the credit spread of an option's implied bond, the portfolio long a risk-free bond and short a put option. NIS normalizes IS by the risk-neutral default probability and reflects tail risk. IS and NIS are countercyclical and predict implied bond returns, while neither, like implied volatility, predicts put returns. These opposite predictability results are consistent with a stochastic volatility, stochastic jump intensity model, as put premia increase in volatility but decrease in jump intensity, while implied bond premia increase in both.
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Mode of access: World Wide Web.
Option-Implied Spreads and Option Risk Premia / Christopher L. Culp, Mihir Gandhi, Yoshio Nozawa, Pietro Veronesi. - Cambridge, Mass. National Bureau of Economic Research 2021. - 1 online resource: illustrations (black and white); - NBER working paper series no. w28941 . - Working Paper Series (National Bureau of Economic Research) no. w28941. .
June 2021.
We propose implied spreads (IS) and normalized implied spreads (NIS) as simple measures to characterize option prices. IS is the credit spread of an option's implied bond, the portfolio long a risk-free bond and short a put option. NIS normalizes IS by the risk-neutral default probability and reflects tail risk. IS and NIS are countercyclical and predict implied bond returns, while neither, like implied volatility, predicts put returns. These opposite predictability results are consistent with a stochastic volatility, stochastic jump intensity model, as put premia increase in volatility but decrease in jump intensity, while implied bond premia increase in both.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.