Tests for the existence and the sign of the volatility risk premium are often based on expected option hedging errors. When the hedge is performed under the ideal conditions of continuous trading and correct model specification, the sign of the premium is the same as the sign of the mean hedging...

We perform a general equilibrium analysis in a complete markets economy whenthe dividend follows a jump-diffusion process with stochastic volatility. Agents haveCRRA utility, but differ with respect to their degree of risk aversion. The keyoutput of our analysis is the structure of the...

In this paper we perform a general equilibrium analysis when the dividend followsa jump-diffusion process with stochastic volatility, where both the dividend itselfand its volatility can jump. We work in a complete markets economy and assumethat agents have CRRA utility, but can differ with...

Variance contracts permit the trading of ’variance risk’, i.e. the risk that the realizedvariance of stock returns changes randomly over time. We discuss why investorsmight want to trade this type of risk, and why they might prefer a variance contractto standard calls and puts for this...

Model mis-specification can cause substantial utility losses in portfolio planning.In this paper, we compare two approaches to cope with this problem,robust control and learning. We derive the optimal portfolio strategies and theutility losses due to model mis-specification. Surprisingly,...

We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of stocks indicate that investors demand on average more than five percent return per year as a...

We propose a long-run risk model with stochastic volatility, a time-varying mean reversion level of volatility, and jumps in the state variables. The special feature of our model is that the jump intensity is not affine in the conditional variance but driven by a separate process. We show that...

We show that time-varying volatility of volatility is a significant risk factor which affects the cross-section and the time-series of index and VIX option returns, beyond volatility risk itself. Volatility and volatility-of-volatility measures, identified modelfree from the option price data as...

This paper examines continuous-time models for the price and volatility processes of individual stocks and the S\amp;P 100 index via Markov Chain Monte Carlo estimation. We find that the stochastic processes governing individual stocks are rather heterogeneous. A key result of our investigation...

We produce novel empirical evidence on the relevance of temperature volatility shocks for the dynamics of macro aggregates and asset prices. Using two centuries of UK temperature data, we document that the relationship between temperature volatility and the macroeconomy varies over time. First,...