Equilibrium VIX in Inelastic Markets

Albert J. Menkveld

No 20834, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: On average, the squared VIX exceeds realized variance. This implies that investors pay a premium to hold variance risk. But, why *pay* for risk? And, why does the premium correlate with volume? In Grossman-Miller type inelastic markets, investors hold variance risk to hedge against liquidity shocks, because these shocks cause price pressures that add to realized variance. Therefore, a positive variance risk premium must emerge in equilibrium. This result is developed formally, and the model is calibrated to match empirical patterns in the variance risk premium and trading volume around eleven crises between 1993 and 2025.

Keywords: Vix; Liquidity; Cboe vix (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2025-11
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP20834 (application/pdf)

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:cpr:ceprdp:20834

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP20834

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().