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Variance-of-Variance Risk Premium

Andreas Kaeck

Review of Finance, 2018, vol. 22, issue 4, 1549-1579

Abstract: This article explores the premium for bearing the variance risk of the VIX index, called the variance-of-variance risk premium. I find that during the sample period from 2006 until 2014 trading strategies exploiting the difference between the implied and realized variance of the VIX index yield average excess returns of − 24.16% per month, with an alpha of − 16.98% after adjusting for Fama–French and Carhart risk factors as well as accounting for variance risk (both highly significant). The article provides further evidence of risk premium characteristics using corridor variance swaps and compares empirical results with the predictions of reduced-form and structural benchmark models.

Keywords: VIX; Stochastic volatility-of-volatility; Variance risk premium (search for similar items in EconPapers)
JEL-codes: C15 C32 G13 G15 (search for similar items in EconPapers)
Date: 2018
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