Abstract
AbstractWe provide non‐parametric empirical evidence regarding negative volatility risk premium using LIFFE equity index options. In addition, we incorporate the moment‐adjusted option delta hedge ratio to mitigate the effect of model misspecification. From the results, we observe several interesting phenomena. First, the delta‐hedged gains are negative. Second, with a correction for model misspecification, higher‐order moments measures show less significance and the volatility risk premium still plays a key role in affecting delta‐hedged gains. All empirical evidence supports the existence of negative volatility risk premium in LIFFE equity index options.
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