Florian Borchard, M. Sc.

Volatility and jump risks as determinants of index option returns

Empirically observable returns on index options that are far out of the money are negative on average. While for put options only the sometimes extreme extend is surprising, a positive return would actually be expected for call options in conventional models. The discrepancy between theoretical and empirically observable returns is known as the "index option return puzzle". Possible solutions include the additional consideration of premiums for jump risks and/or volatility risks. Both explanatory approaches compete in the literature, with partly different results.

The research project will examine to which extent a more precise differentiation between the influence of jump and volatility risks can be achieved, for example by explicitly considering the influence of the volatility of the underlying. In addition, it will be examined to what extent the inconsistency of the jump risk premium-based approach with negative returns on call options shown in the literature can be overcome by using a more realistic jump model with somewhat flexible differentiation with regard to the direction of the jump.

• Pieces of the index-option-return-puzzle – Some new evidence
  Workshop of the German Operations Research Society: Working Group on Financial Management and Investments (GOR AG FMI)
  Paris, 13.03.2024.
• Instantaneous Volatility and Index Option Returns

  Internationales Doktorandenseminar "Banking and Finance" 2022 (IDS)
  Stuttgart, 07.10.2022.