Unveiling S&P 500 Risk Premiums: Predicting Market Movements with 63% Accuracy
The S&P 500 spot index and option markets show significant and changing risk premia. By analyzing spot and option prices, researchers estimated diffusive stock risk premium, price jump risk premium, diffusive variance risk premium, and variance jump risk premium. These risk premia are both statistically and economically important. By studying the economic factors influencing these risk premia, researchers were able to explain up to 63% of the variations in them.