Negative Market Volatility Risk Premium: Evidence from the LIFFE Equity Index Options*

Authors


  • *

    We thank the valuable comments from anonymous referees.

**Department of Finance, National Chung Hsing University, No. 250, Kuo-Kuan Road, Taichung, Taiwan; E-mail: linbh@dragon.nchu.edu.tw; Tel: +886-4-22840591; Fax: +886-4-22856015.

Abstract

We provide non-parametric empirical evidence regarding negative volatility risk premium using LIFFE equity index options. In addition, we incorporate the moment-adjusted option delta hedge ratio to mitigate the effect of model misspecification. From the results, we observe several interesting phenomena. First, the delta-hedged gains are negative. Second, with a correction for model misspecification, higher-order moments measures show less significance and the volatility risk premium still plays a key role in affecting delta-hedged gains. All empirical evidence supports the existence of negative volatility risk premium in LIFFE equity index options.

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