Consumption risks in option returns

Shuwen Yang, Kevin Aretz, Hening Liu, Yuzhao Zhang

Research output: Contribution to journalArticlepeer-review


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

Original languageEnglish (US)
Pages (from-to)285-302
Number of pages18
JournalJournal of Empirical Finance
StatePublished - Dec 2022

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


  • Consumption growth
  • Option returns
  • Recursive utility
  • Volatility risk


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