Crashes, volatility, and the equity premium: lessons from S&P 500 options

Pedro Santa-Clara; Shu Yan

doi:10.1162/rest.2010.11549

Crashes, volatility, and the equity premium: lessons from S&P 500 options

Pedro Santa-Clara, Shu Yan

NOVA School of Business and Economics (NOVA SBE)

Research output: Contribution to journal › Article › peer-review

181 Citations (Scopus)

Abstract

We use a novel pricing model to imply time series of diffusive volatility and jump intensity from S&P 500 index options. These two measures capture the ex ante risk assessed by investors. Using a simple general equilibrium model, we translate the implied measures of ex ante risk into an ex ante risk premium. The average premium that compensates the investor for the ex ante risks is 70% higher than the premium for realized volatility. The equity premium implied from option prices is shown to significantly predict subsequent stock market returns.

Original language	English
Pages (from-to)	435-451
Number of pages	17
Journal	Review of Economics and Statistics
Volume	92
Issue number	2
DOIs	https://doi.org/10.1162/rest.2010.11549
Publication status	Published - 1 May 2010

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Crashes, volatility, and the equity premium: lessons from S&P 500 options

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