11:00 - "Modeling Higher Moments and Risk Premia for S&P 500 Returns" 
 

Jeroen Rombouts (ESSEC Business School) 

Modeling Higher Moments and Risk Premia for S&P 500 Returns

Abstract: 
We study the impact of additional option pricing model factors on the level, term structure and conditional properties of index return moments and their risk premia. Higher moments are more informative than model-implied equity premia, variances, and variance risk premia for assessing model performance. Based on estimates from a joint option and return likelihood obtained using novel estimation techniques, we relate these model properties to differences in option and return fit. Including three stochastic volatility factors greatly improves option fit. The resulting time series of skewness and kurtosis better match non-parametric benchmarks and the model generates larger skewness and kurtosis risk premia, but it struggles to match the term structure of higher moments. Return jumps improve the modeling of the term structure of skewness and kurtosis and generate larger and more variable skewness and kurtosis risk premia at short horizons, but do not improve option fit in the presence of three stochastic volatility factors.

Authors: Arnaud Dufays, Kris Jacobs and Jeroen Rombouts