Global variance term premia and intermediary risk appetite

Peter Van Tassel and Erik Vogt

No 789, Staff Reports from Federal Reserve Bank of New York

Abstract: Sellers of variance swaps earn time-varying risk premia for their exposure to realized variance, the level of variance swap rates, and the slope of the variance swap curve. To measure risk premia, we estimate a dynamic term structure model that decomposes variance swap rates into expected variances and term premia. Empirically, we document a strong global factor structure in variance term premia across the U.S., U.K., Europe, and Japan. We further show that variance term premia are negatively correlated with the risk appetite of hedge funds, broker-dealers, and mutual funds. Our results support the hypothesis that financial intermediaries are marginal investors in the variance swap market.

Keywords: variance swaps; variance risk premium; term structures; empirical asset pricing; volatility; financial intermediaries (search for similar items in EconPapers)
JEL-codes: C58 G12 G13 (search for similar items in EconPapers)
Date: 2016-08-12
New Economics Papers: this item is included in nep-ifn and nep-upt
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Citations: View citations in EconPapers (3)

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Working Paper: Global Variance Term Premia and Intermediary Risk Appetite (2017)
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