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Same firm, two volatilities: How variance risk is priced in credit and equity markets

Arben Kita and Daniel Tortorice ()

Journal of Corporate Finance, 2021, vol. 69, issue C

Abstract: Variance risk premia (VRP) based on equity and credit market information for the same firm differ substantially in magnitude. VRP is strongly dependent on firm characteristics. Higher-leveraged and larger firms have lower VRP. The smirk in the plot of VRP vs. leverage is higher for low-levered firms than for high-levered firms. This smirk is more pronounced in the credit market than in the equity market. VRP, and especially credit VRP, correlates with higher future returns and is a priced source of risk in both markets.

Keywords: Variance risk premia; Implied volatility; Realized volatility; CDS; Stocks (search for similar items in EconPapers)
JEL-codes: C58 G12 G13 G40 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jcorpfin.2021.101885

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