Buraschi, Andrea, Trojani, Fabio and Vedolin, Andrea (2011) When uncertainty blows in the orchard: comovement and equilibrium volatility risk premia. EFA 2009 Bergen meetings paper, SSRN.
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)|
|Additional Information:||© 2011 The authors|
|Uncontrolled Keywords:||disagreement, correlation, uncertainty, volatility risk premium|
|Library of Congress subject classification:||H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
|Journal of Economic Literature Classification System:||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
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