The term structure of equity and variance risk premia

Yacine Ait-Sahalia, Mustafa Karaman and Loriano Mancini

Journal of Econometrics, 2020, vol. 219, issue 2, 204-230

Abstract: We study the term structure of variance swaps, equity and variance risk premia. A model-free analysis reveals a significant price jump component in variance swaps. A model-based analysis shows that investors’ willingness to ensure against volatility risk increases after a market drop. This effect is stronger for short maturities, but more persistent for long maturities. During the financial crisis investors demanded large risk premia to hold equities, but the risk premia largely depended on and strongly decreased with the holding horizon. The term structure of equity and variance risk premia responds differently to various economic indicators.

Keywords: Variance swap; Stochastic volatility; Likelihood approximation; Term structure; Equity risk premium; Variance risk premium (search for similar items in EconPapers)
JEL-codes: C51 G12 G13 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:219:y:2020:i:2:p:204-230

DOI: 10.1016/j.jeconom.2020.03.002

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