EconPapers    
Economics at your fingertips  
 

The Variation in Variance Risk Premium and its Predictive Power: Evidence from Option Market Sentiments

Y. Peter Chung () and Sun-Joong Yoon
Additional contact information
Y. Peter Chung: School of Business, University of California, Riverside, CA, USA
Sun-Joong Yoon: Dongguk Business School, Dongguk University, Seoul, South Korea

Quarterly Journal of Finance (QJF), 2020, vol. 10, issue 03, 1-46

Abstract: We show that the highly volatile variance risk premium (VRP) can be theoretically and empirically reconciled with investor sentiment captured by temporary variation in risk aversion. In an effort to understand the poor predictive power of the VRP in non-U.S. markets, we propose a new investor sentiment index, the Variance Sentiment Index(VSI), obtained from the trading behavior of individual investors. We show that the VSI predicts local return dynamics, in a similar way to what the VRP does in the U.S. market. Moreover, the VSI does not lose its predictive power even in the presence of the global VRP.

Keywords: Variance risk premium; investor sentiment; Variance Sentiment Index; S&P 500; KOSPI; TAIEX (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S201013922050010X
Access to full text is restricted to subscribers

Related works:
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: https://EconPapers.repec.org/RePEc:wsi:qjfxxx:v:10:y:2020:i:03:n:s201013922050010x

Ordering information: This journal article can be ordered from

DOI: 10.1142/S201013922050010X

Access Statistics for this article

Quarterly Journal of Finance (QJF) is currently edited by Fernando Zapatero

More articles in Quarterly Journal of Finance (QJF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().

 
Page updated 2025-03-20
Handle: RePEc:wsi:qjfxxx:v:10:y:2020:i:03:n:s201013922050010x