Finance & Financial Econometrics : 
Time: 11.00 am
Date: 07th of March 2023
Room 31001

Jeroen ROMBOUTS (ESSEC) – “Modeling Higher Moments and Risk Premiums for S&P 500 Returns”

Abstract : Using joint estimation on a large sample of index option prices and the underlying returns, we study how multifactor models capture time-series and cross-sectional patterns in option prices through improved modeling of the dynamics of the first four moments of the return distribution. Including a second and especially a third stochastic volatility factor greatly improves option fit, and the resulting time series of skewness and kurtosis better match non-parametric benchmarks. The third volatility factor is critical in generating larger and more variable skewness and kurtosis risk premiums. Return jumps provide more modest improvements in option fit and a higher equity risk premium, but their impact on higher moment risk premiums is small. All models we investigate struggle to match the unconditional term structure of risk-neutral skewness and kurtosis.

Organizers:

Jean-Michel ZAKOIAN (CREST)

Sponsors:
CREST