Understanding the skew in option prices
Kozhan, Roman, Neuberger, Anthony and Schneider, Paul (2011) Understanding the skew in option prices. Working Paper. United States: American Finance Association. AFA 2011 Denver Meetings Paper .Full text not available from this repository.
We introduce a trading strategy that directly exploits the skew in the implied volatility surface in a model-free way. Profits from the strategy have a representation as the difference between implied and realized skew, the skew risk premium. We show that the skew risk premium does exist, and we provide evidence that it depends on the same underlying risk factor as the variance risk premium: Strategies designed to exploit one of the risk premiums but to hedge out the other make zero excess returns. The existence of the skew risk premium and its tight relation to the variance risk premium are consistent with the general equilibrium model of Eraker (2008).
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
|Series Name:||AFA 2011 Denver Meetings Paper|
|Publisher:||American Finance Association|
|Place of Publication:||United States|
|Official Date:||August 2011|
|Number of Pages:||43|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Restricted or Subscription Access|
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