Abstract
We offer evidence that exposures to consumption growth, expected consumption growth, and consumption volatility are significantly priced in the cross-section of delta-hedged option and straddle returns. Consumption growth and expected consumption growth command a positive risk premium, whereas consumption volatility commands a negative risk premium. In a representative-agent economy with recursive preferences, our results suggest that investors prefer early resolution of uncertainty. Our results further suggest that consumption risk exposures provide rational foundations for well-known relations between option moneyness or idiosyncratic underlying-stock volatility and the cross-section of delta-hedged option or straddle returns.
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