Equity Volatility Term Premia

Peter Van Tassel

No 867, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper estimates the term-structure of volatility risk premia for the stock market. Realized variance term premia are increasing in systematic risk and predict variance swap returns. Implied volatility term premia are decreasing in risk initially, but then increase at a lag, predicting VIX futures returns. By modeling the logarithm of realized variance, the paper derives a closed-form relationship between the prices of variance swaps and VIX futures. The model provides accurate pricing and highlights periods of dislocation between the index options and VIX futures markets. Term premia account for a significant fraction of the variation in long-maturity claims.

Keywords: options; variance risk premium; variance swaps; term structures; return predictability; VIX futures (search for similar items in EconPapers)
JEL-codes: C58 G12 G13 (search for similar items in EconPapers)
Pages: 81
Date: 2018-09-01
New Economics Papers: this item is included in nep-fmk, nep-rmg and nep-upt
Note: Revised December 2020. Previous title: “Relative Pricing and Risk Premia in Equity Volatility Markets”
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Citations: View citations in EconPapers (1)

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Working Paper: Equity Volatility Term Premia (2021)
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