The term structure of the price of variance risk

Marianne Andries, Thomas Eisenbach, Robert Kahn and Martin Schmalz

No 736, Staff Reports from Federal Reserve Bank of New York

Abstract: We empirically investigate the term structure of variance risk pricing and how it varies over time. We estimate the aversion to variance risk in a stochastic-volatility option pricing model separately for options of different maturities and find that variance risk pricing decreases in absolute value with maturity but remains significantly different from zero up to the nine-month horizon. We find consistent non-parametric results using estimates from Sharpe ratios of delta-neutral straddles. We further show that the term structure is downward sloping both during normal times and in times of stress, when required compensation for variance risk increases and its term structure steepens further.

Keywords: volatility risk; option returns; term structure (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 34
Date: 2015-08-01
New Economics Papers: this item is included in nep-rmg
Note: Revised January 2025.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr736.pdf Full text (application/pdf)
https://www.newyorkfed.org/research/staff_reports/sr736.html Summary (text/html)

Related works:
Working Paper: The Term Structure of the Price of Variance Risk (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:736

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().