Bernales et al 2017.pdf (1.21 MB)
Learning and forecasts on option returns through the volatility risk premium
journal contribution
posted on 2023-06-09, 13:03 authored by Bernales Alejandro, Louisa ChenLouisa Chen, Marcela ValenzuelaWe use learning in an equilibrium model to explain the puzzling predictive power of the volatility risk premium (VRP) for option returns. In the model, a representative agent follows a rational Bayesian learning process in an economy under incomplete information with the objective of pricing options. We show that learning induces dynamic differences between probability measuresP and Q, which produces predictability patterns from the VRP for option returns. The forecasting features of the VRP for option returns, obtained through our model, exhibit the same behaviour as those observed in an empirical analysis with S&P 500 index options.
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Publication status
- Published
File Version
- Accepted version
Journal
Journal of Economic Dynamics and ControlISSN
0165-1889Publisher
ElsevierExternal DOI
Volume
82Page range
312 -330Department affiliated with
- Business and Management Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2018-04-25First Open Access (FOA) Date
2019-07-13First Compliant Deposit (FCD) Date
2018-04-25Usage metrics
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