Aggregate Volatility and Market Jump Risk: An Option-Based Explanation to Size and Value Premia

Abstract

It is well documented that stock returns have different sensitivities to changes in aggregate volatility, however less is known about their sensitivity to market jump risk. By using S&P 500 crash-neutral at-the-money straddle and out-of-money put returns as proxies for aggregate volatility and market jump risk, I document significant differences between volatility and jump loadings of value versus growth, and small versus big portfolios. In particular, small (big) and value (growth) portfolios exhibit negative (positive) and significant volatility and jump betas. I also provide further evidence that both volatility and jump risk factors are priced and negative.