When Uncertainty Blows in the Orchard: Comovement and Equilibrium Volatility Risk Premia





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    • Buraschi is with the University of Chicago, Booth School of Business and Imperial College London, Business School. Trojani is with the University of Lugano and a Research Fellow at the Swiss Finance Institute. Vedolin is with the London School of Economics. We thank the Editor, Cam Harvey, an Associate Editor, an anonymous referee, John Cochrane, Jérôme Detemple, Bernard Dumas, John Heaton, Christian Heyerdahl-Larsen, Ian Martin, Chay Ornthanalai, Rodolfo Prieto, Dimitri Vayanos, Paul Whelan, and the participants at the European Finance Association Meeting, American Finance Association Meeting, Western Finance Association Meeting, University of Chicago, Booth School of Business, Imperial College, London School of Economics, Università Ca' Foscari, and EdHec for valuable comments. Trojani gratefully acknowledges the financial support of the Swiss National Science Foundation (NCCR FINRISK and Grants 101312–103781/1 and 100012–105745/1) and the Swiss Finance Institute (Project “Term Structures and Cross-Sections of Asset Risk Premia”). Vedolin acknowledges the financial support of the Swiss National Science Foundation (Grant PBSG1–119230).


We provide novel evidence for an equilibrium link between investors' disagreement, the market price of volatility and correlation, and the differential pricing of index and individual equity options. We show that belief disagreement is positively related to (i) the wedge between index and individual volatility risk premia, (ii) the different slope of the smile of index and individual options, and (iii) the correlation risk premium. Priced disagreement risk also explains returns of option volatility and correlation trading strategies in a way that is robust to the inclusion of other risk factors and different market conditions.