Can tests based on option hedging errors correctly identify volatility risk premia?
Tests for the existence and the sign of the volatility risk premium are often based on expected option hedging errors. When the hedge is performed under the ideal conditions of continuous trading and correct model specification, the sign of the premium is the same as the sign of the mean hedging error for a large class of stochastic volatility option pricing models. We show, however, that the problems of discrete trading and model mis-specification, which are necessarily present in any empirical study, may cause the standard test to yield unreliable results. JEL: G12, G13
| Author: | Nicole Branger, Christian Schlag |
|---|---|
| URN: | urn:nbn:de:hebis:30-17690 |
| Series (Serial Number) | Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting (136, Versi) |
| Document Type: | Working Paper |
| Language: | English |
| Date of Publication (online): | 06.10.2005 |
| Year of first Publication: | 2004 |
| Publishing Institution: | Univ.-Bibliothek Frankfurt am Main |
| Tag: | Volatilität / Risikoprämie / Statistischer Test / Optionspreistheorie / Stochastischer Prozess / Theorie Discretization Error ; Model Error; Stochastic Volatility ; Volatility Risk Premium |
| Source: | Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting ; 136, Version 24 Mai 2004 |
| HeBIS PPN: | 180411799 |
| Institutes: | Wirtschaftswissenschaften |
| Dewey Decimal Classification: | 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Note: | This paper was formerly titled 'Is Volatility Risk Priced? | Properties of Tests Based on Option Hedging Errors'. Earlier versions were presented at Arizona State University, at the 35th Annual Meeting of the Money, Macro, and Finance Research Group conference in Cambridge, at the EIASM Workshop on Dynamic Strategies in Asset Allocation and Risk Management in Brussels, at the 2003 annual congress of the Verein für Socialpolitik in Zurich, at the 10th Annual Meeting of the German Finance Association in Mainz, at the annual meetings of European Investment Review in Geneva, and at the 2003 MathFinance Colloquium in Frankfurt. |
| Licence (German): |  Veröffentlichungsvertrag für Publikationen ohne Print on Demand |
