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Model specification and risk premia: evidence from futures options

Broadie, Mark, Chernov, Mikhail and Johannes, Michael (2007) Model specification and risk premia: evidence from futures options. Journal of Finance, 62 (3). pp. 1453-1490. ISSN 0022-1082

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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.

Item Type: Article
Official URL:
Additional Information: © 2007 The American Finance Association
Divisions: Finance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C10 - General
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
Date Deposited: 10 Nov 2011 10:22
Last Modified: 20 Oct 2021 01:44

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