Abstract
In this paper, we examine whether the volatility risk or jump risk is priced in the Taiwan options market by constructing a delta-hedged option portfolio. If volatility risk is priced, then the average delta-hedged portfolio gains are nonzero and the sign and magnitude are determined by the volatility risk premium. After confirming the role of volatility risk, we consider the second factor, jump risk. We add two proxies, the skewness and kurtosis of the risk-neutral index distribution, to capture the probabilities of jump events. By the time-series regression models, we can get the following results. First, the delta-hedged portfolio underperforms zero, and consistent with a negative volatility risk premium. Second, the jump which is tested by the skewness and kurtosis of the risk-neutral index distribution also significantly affects the delta-hedged gains. As a result, the volatility risk and jump risk both are priced in the Taiwan options markets.