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When uncertainty blows in the orchard: comovement and equilibrium volatility risk premia

Vedolin, Andrea and Buraschi, Andrea and Trojani, Fabio (2014) When uncertainty blows in the orchard: comovement and equilibrium volatility risk premia. Journal of Finance, 69 (1). pp. 101-137. ISSN 0022-1082

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Identification Number: 10.1111/jofi.12095

Abstract

We provide novel evidence for an equilibrium link between investors' disagreement, the market price of volatility and correlation, and the differential pricing of index and individual equity options. We show that belief disagreement is positively related to (i) the wedge between index and individual volatility risk premia, (ii) the different slope of the smile of index and individual options, and (iii) the correlation risk premium. Priced disagreement risk also explains returns of option volatility and correlation trading strategies in a way that is robust to the inclusion of other risk factors and different market conditions.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/%28...
Additional Information: © 2013 American Finance Association
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 30 Oct 2013 10:41
Last Modified: 18 Jun 2014 09:39
Projects: NCCR FINRISK, 101312–103781/1, 100012–105745/1, PBSG1–119230
Funders: Swiss National Science Foundation, Swiss Finance Institute
URI: http://eprints.lse.ac.uk/id/eprint/37440

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