Up- and Downside Variance Risk Premia in Global Equity Markets

Matthias Held () and Marcel Omachel ()
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Matthias Held: Faculty of Finance, WHU - Otto Beisheim School of Management
Marcel Omachel: Faculty of Finance, WHU - Otto Beisheim School of Management

No 140009, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: This paper studies the variance risk premium from a new perspective by disaggregating the total premium into upper and lower semivariance premia. To this end, we provide novel tools for computing conditional expectations using traded options as well as moment generating functions. Across a dataset of global stock market indices, we find that the variance premium is almost exclusively driven by downside risk. Our results are robust with respect to the sample period. These findings substantiate the hypothesis found in the literature that the variance premium is largely driven by the left tail of the index return distribution.

Keywords: variance risk premium; semivariance; derivatives (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2014-09
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mag:wpaper:140009

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