Abstract
The purpose of this study is to investigate whether volatility risk or jump risk is priced in the Taiwan options market by constructing delta-hedged option portfolios (set the option long and use futures to hedge). Data from the Taiwan Futures Exchange are used in this research, covering the period from January 1, 2003, to December 31, 2006, in which the most influential political and social events in Taiwan history occurred. Results show that the delta-hedged portfolio underperforms zero, which implies a negative volatility risk premium. Also, by using skewness and kurtosis of the risk-neutral index distribution as proxies, jump risk is also proved to be responsible for the negative delta-hedged gains.
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