Variance risk premiums in foreign exchange markets

Manuel Ammann and Ralf Buesser

Journal of Empirical Finance, 2013, vol. 23, issue C, 16-32

Abstract: Based on the theory of static replication of variance swaps we assess the sign and magnitude of variance risk premiums in foreign exchange markets. We find significantly negative risk premiums when realized variance is computed from intraday data with low frequency. As a likely consequence of microstructure effects however, the evidence is ambiguous when realized variance is based on high-frequency data. Common to all estimates, variance risk premiums are highly time-varying and inversely related to the risk-neutral expectation of future variance.

Keywords: Foreign exchange; Variance risk premium; Variance swap; Intraday data; Risk-neutral expectation; Jump risk (search for similar items in EconPapers)
JEL-codes: C12 C13 F31 G12 G13 G15 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:23:y:2013:i:c:p:16-32

DOI: 10.1016/j.jempfin.2013.04.006

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