Discussion paper

DP15239 Hedging macroeconomic and financial uncertainty and volatility

We study the pricing of shocks to uncertainty and volatility using a wide-ranging set of options contracts covering a variety of different markets. If uncertainty shocks are viewed as bad by investors, they should carry negative risk premia. Empirically, however, uncertainty risk premia are positive in most markets. Instead, it is the realization of large shocks to fundamentals that has historically carried a negative premium. In other words, we find that the return premium for gamma is negative while that for vega is positive. These results imply that it is jumps, for which exposure is measured by gamma, not forward-looking uncertainty shocks, measured by vega, that drive investors’ marginal utility. In further support of the jump interpretation, the return patterns are more extreme for deeper out of the money options.


Dew-Becker, I, S Giglio and B Kelly (2020), ‘DP15239 Hedging macroeconomic and financial uncertainty and volatility‘, CEPR Discussion Paper No. 15239. CEPR Press, Paris & London. https://cepr.org/publications/dp15239