Insurance Against Volatility Risk or Negative Skewness as Reflected by Option Returns in Emerging European Markets

This study examines the risk premia embedded in index option prices using a sample of emerging European Union countries. In contrast to the `over-priced puts puzzle' in the US market, writing puts in developing European exchanges is found to offer insignificant returns after accounting for risk. However, investors were paying a substantial premium for insurance against

volatility risk, especially during the crisis. Insurance against negative skewness also commanded a high premium before the crisis, that disappeared post 2008. The returns of profitable option-selling strategies cannot be explained in an obvious way as compensation for risk across a set of factors.