Bakshi, Gurdip
[VerfasserIn]
;
Crosby, John
[Sonstige Person, Familie und Körperschaft];
Gao Bakshi, Xiaohui
[Sonstige Person, Familie und Körperschaft]
The Dark Matter in Equity Index Volatility Dynamics
Anmerkungen:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments November 12, 2019 erstellt
Beschreibung:
If the evolution of equity index volatility and the pricing kernel were to be absent of risks unspanned by index futures, it would counterfactually imply that (i) the expected excess return of OTM calls on futures is positive, (ii) the expected excess return of straddles is approximately zero, and (iii) futures returns and changes in volatility are perfectly correlated. Remedying these contradictions, we consider a specification of market incompleteness that equips the pricing kernel and volatility dynamics with unspanned risks and generates negative local time risk premiums. The empirical evidence is supportive of our theory of economically relevant unspanned risks