Jump Variance Risk: Evidence from Option Valuation and Stock Returns

Journal of Futures Markets, Volume 39, Issue 7, pp. 890-915

47 Pages Posted: 17 Mar 2017 Last revised: 16 Oct 2021

See all articles by Hsuan-Ling Chang

Hsuan-Ling Chang

Tamkang University; National Taiwan University

Yen-Cheng Chang

National Taiwan University - Department of Finance; National Taiwan University - Center for Research in Econometric Theory and Applications

Hung-Wen Cheng

Department of Financial Engineering and Actuarial Mathematics, Soochow University; Department of Financial Engineering and Actuarial Mathematics, Soochow University

Po-Hsiang Peng

University of Chicago

Kevin Tseng

The Chinese University of Hong Kong (CUHK) - CUHK Business School; National Taiwan University - Department of Finance; National Taiwan University - Center for Research in Econometric Theory and Applications

Date Written: March 14, 2019

Abstract

We study jump variance risk by jointly examining both stock and option markets. We develop a GARCH option pricing model with jump variance dynamics and a non-monotonic pricing kernel featuring jump variance risk premium. The model yields a closed-form option pricing formula and improves in fitting index options from 1996 to 2015. The model-implied jump variance risk premium has predictive power for future market returns. In the cross-section, heterogeneity in exposures to jump variance risk leads to a 6% difference in risk-adjusted returns annually.

Keywords: Jump Variance Risk, Option Valuation, Non-Monotonic Pricing Kernel, Return Predictability

Suggested Citation

Chang, Hsuan-Ling and Chang, Yen-Cheng and Cheng, Hung-Wen and Cheng, Hung-Wen and Peng, Po-Hsiang and Tseng, Kevin, Jump Variance Risk: Evidence from Option Valuation and Stock Returns (March 14, 2019). Journal of Futures Markets, Volume 39, Issue 7, pp. 890-915, Available at SSRN: https://ssrn.com/abstract=2934077 or http://dx.doi.org/10.2139/ssrn.2934077

Hsuan-Ling Chang

Tamkang University

No.151, Yingzhuan Rd
Taiwan, New Taipei City 25137
China

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

Yen-Cheng Chang (Contact Author)

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

National Taiwan University - Center for Research in Econometric Theory and Applications ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Hung-Wen Cheng

Department of Financial Engineering and Actuarial Mathematics, Soochow University ( email )

56, Sec. 1, Kueiyang St., Taipei, Taiwan 100
Taipei, 100
Taiwan

Department of Financial Engineering and Actuarial Mathematics, Soochow University ( email )

56, Sec. 1, Kueiyang St., Taipei, Taiwan 100
Taipei, 100
Taiwan

Po-Hsiang Peng

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Kevin Tseng

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

National Taiwan University - Center for Research in Econometric Theory and Applications ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

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