The Term Structure of Variance Swaps and Risk Premia

Yacine Ait-Sahalia, Mustafa Karaman and Loriano Mancini
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Mustafa Karaman: University of Zurich
Loriano Mancini: University of Lugano and Swiss Finance Institute

No 18-37, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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 swap rates. A model-based analysis shows that investors' willingness to ensure against volatility risk increases after a market drop. This effect is stronger for short horizons and more persistent for long horizons. During the financial crisis investors demanded large risk premia to hold equities but the risk premia largely depended 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)
Pages: 64 pages
Date: 2018-05
New Economics Papers: this item is included in nep-fmk, nep-rmg and nep-upt
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1837

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