Economics at your fingertips  

How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns

Eirini Konstantinidi and George Skiadopoulos

Journal of Banking & Finance, 2016, vol. 62, issue C, 62-75

Abstract: We explore whether the market variance risk premium (VRP) can be predicted. We measure VRP by distinguishing the investment horizon from the variance swap’s maturity. We extract VRP from actual S&P 500 variance swap quotes and we test four classes of predictive models. We find that the best performing model is the one that conditions on trading activity. This relation is also economically significant. Volatility trading strategies which condition on trading activity outperform popular benchmark strategies, even once we consider transaction costs. Our finding implies that broker dealers command a greater VRP to continue holding short positions in index options in the case where trading conditions deteriorate.

Keywords: Funding illiquidity; Predictability; Variance swaps; Variance risk premium; Volatility trading (search for similar items in EconPapers)
JEL-codes: G13 G17 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
Working Paper: How Does the Market Variance Risk Premium Vary over Time? Evidence from S&P 500 Variance Swap Investment Returns (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-03-31
Handle: RePEc:eee:jbfina:v:62:y:2016:i:c:p:62-75