Skip Navigation

This Article
Right arrow Full Text (PDF)
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Similar articles in ISI Web of Science
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrow Search for citing articles in:
ISI Web of Science (47)
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Bakshi, G.
Right arrow Articles by Kapadia, N.
Right arrow Search for Related Content
Related Collections
Right arrow G11 - Portfolio Choice; Investment Decisions
Right arrow G12 - Asset Pricing; Trading volume; Bond Interest Rates
Right arrow G13 - Contingent Pricing; Futures Pricing
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

Rev Fin 2003; 16:527-566
© 2003 the Society for Financial Studies

Delta-Hedged Gains and the Negative Market Volatility Risk Premium

Gurdip Bakshi
University of Maryland

Nikunj Kapadia
University of Massachusetts–Amherst

Address correspondence to: Nikunj Kapadia, Department of Finance and Operations Management, Isenberg School of Business, University of Massachusetts, Amherst, MA 01003, or e-mail: nkapadia{at}som.umass.edu.

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.


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?


This article has been cited by other articles:


Home page
 JOURNAL OF FINANCIAL ECONOMETRICSHome page
P. Carr and L. Wu
Stock Options and Credit Default Swaps: A Joint Framework for Valuation and Estimation
J. Financial Econometrics, July 21, 2009; (2009) nbp010v1.
[Abstract] [Full Text] [PDF]

Home page
 REV FINANC STUDHome page
V. Todorov
Variance Risk-Premium Dynamics: The Role of Jumps
Rev. Financ. Stud., May 6, 2009; (2009) hhp035v1.
[Abstract] [Full Text] [PDF]

Home page
 REV FINANC STUDHome page
J.-C. Duan and J. Wei
Systematic Risk and the Price Structure of Individual Equity Options
Rev. Financ. Stud., May 1, 2009; 22(5): 1981 - 2006.
[Abstract] [Full Text] [PDF]

Home page
 REV FINANC STUDHome page
P. Carr and L. Wu
Variance Risk Premiums
Rev. Financ. Stud., March 1, 2009; 22(3): 1311 - 1341.
[Abstract] [Full Text] [PDF]

Home page
 REV FINANC STUDHome page
J. M. Vanden
Information Quality and Options
Rev. Financ. Stud., November 1, 2008; 21(6): 2635 - 2676.
[Abstract] [Full Text] [PDF]

Home page
 Review of FinanceHome page
J. Driessen and P. Maenhout
An Empirical Portfolio Perspective on Option Pricing Anomalies
Review of Finance, August 27, 2007; (2007) rfm024v1.
[Abstract] [Full Text] [PDF]

Home page
 REV FINANC STUDHome page
J. M. Vanden
Option Coskewness and Capital Asset Pricing
Rev. Financ. Stud., December 1, 2006; 19(4): 1279 - 1320.
[Abstract] [Full Text] [PDF]

Home page
 REV FINANC STUDHome page
D. S. Bates
Maximum Likelihood Estimation of Latent Affine Processes
Rev. Financ. Stud., September 1, 2006; 19(3): 909 - 965.
[Abstract] [Full Text] [PDF]


Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.