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

Buraschi, Andrea and Trojani, Fabio and Vedolin, Andrea (2011) When uncertainty blows in the orchard: comovement and equilibrium volatility risk premia. EFA 2009 Bergen meetings paper, SSRN.

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Abstract

We produce novel evidence for an equilibrium link between investors' disagreement, the market price of volatility and correlation risk, 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: Monograph (Working Paper)
Official URL: http://papers.ssrn.com/sol3/JELJOUR_Results.cfm?fo...
Additional Information: © 2011 The authors
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 16 Apr 2012 10:36
Last Modified: 15 Jun 2017 11:38
URI: http://eprints.lse.ac.uk/id/eprint/43093

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