Option-Implied Spreads and Option Risk Premia

Option-Implied Currency Risk Premia

We use cross-sectional information on the prices of G10 currency options to calibrate a non-Gaussian model of pricing kernel dynamics and construct estimates of conditional currency risk premia. We find that the mean historical returns to short dollar and carry factors (HMLFX ) are statistically indistinguishable from their option-implied counterparts, which are free from peso problems. Skewnes...

Understanding Risk Premia in Index Option Prices∗

We explore the reasons why out-of-the-money index puts trade on much higher implied volatilities than out-of-the-money calls. We develop a trading strategy that exploits the skew in implied volatility, and show that it has a simple interpretation. The pay-off to the strategy is identical to that on a swap whose floating leg is equal to the covariation between returns and changes in implied vari...

Option Implied Volatility Factors and the Cross-Section of Market Risk Premia

The main goal of this paper is to study market volatility risk premia. I develop a multifactor model by proposing a pricing kernel, where the market return, the diffusion volatility and the jump volatility are fundamental factors that change the investment opportunity set. Based on estimates of the diffusion and jump volatility factors using an enriched dataset including S&P500 index returns, i...

Option-Implied Term Structures

The illiquidity of long-maturity options has made it difficult to study the term structures of option spanning portfolios. This paper proposes a new estimation and inference framework for these option-implied term structures that addresses long-maturity illiquidity. By building a sieve estimator around the risk-neutral valuation equation, the framework theoretically justifies (fattailed) extrap...

Determining and benchmarking risk neutral distributions implied from option prices