Equity Volatility Term Premia

Charles Smith and Peter Van Tassel

No 20210203, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Investors can buy volatility hedges on the stock market using variance swaps or VIX futures. One motivation for hedging volatility is its negative relationship with the stock market. When volatility increases, stock returns tend to decline contemporaneously, a result known as the leverage effect. In this post, we measure the cost of volatility hedging by decomposing the prices of variance swaps and VIX futures into volatility forecasts and estimates of expected returns (“equity volatility term premia”) from January 1996 to June 2020.

Keywords: variance swaps; VIX futures; term structures; variance risk premium; return predictability (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2021-02-03
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Working Paper: Equity Volatility Term Premia (2018)
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