The equity premium and the volatility spread

The spread between historical and risk-neutral volatilities is seen as a function of the risk premium and of skewness by researchers at the Bank of Canada.

The research uses the homoscedastic gamma model where the distribution of returns is characterised by its mean, variance and an independent skewness parameter under both measures to reach its conclusion.

By measuring skewness from option prices and testing these predictions, the researchers further find that conditioning on skewness increases

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