Delta-Hedged Gains and the Negative Market Volatility Risk Premium

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ID: 299382
2003
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Abstract
We investigate whether the volatility risk premium is negative by examining the statistical properties of delta-hedged option portfolios (buy the option and hedge with stock). Within a stochastic volatility framework, we demonstrate a correspondence between the sign and magnitude of the volatility risk premium and the mean delta-hedged portfolio returns. Using a sample of S&P 500 index options, we provide empirical tests that have the following general results. First, the delta-hedged strategy underperforms zero. Second, the documented underperformance is less for options away from the money. Third, the underperformance is greater at times of higher volatility. Fourth, the volatility risk premium significantly affects delta-hedged gains, even after accounting for jump fears. Our evidence is supportive of a negative market volatility risk premium.
Reference Key
openalex_W3123332101 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Gurdip Bakshi, Nikunj Kapadia
Journal review of financial studies
Year 2003
DOI
10.1093/rfs/hhg002
URL
https://doi.org/10.1093/rfs/hhg002
Keywords Keywords not found

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