How Does the Market Variance Risk Premium Vary over Time? Evidence from S&P 500 Variance Swap Investment Returns

Eirini Konstantinidi and George Skiadopoulos
Additional contact information
Eirini Konstantinidi: University of Manchester

No 732, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: We explore whether the market variance risk premium (VRP) can be predicted. First, we propose a novel approach to measure VRP which distinguishes the investment horizon from the variance swap's maturity. We extract VRP from actual rather than synthetic S&P 500 variance swap quotes, thus avoiding biases in VRP measurement. Next, we find that a deterioration of the economy and of the trading activity, increases VRP. These relations hold both in- and out-of-sample for various maturities and investment horizons and they are economically significant. Volatility trading strategies which condition on the detected relations outperform popular buy-and-hold strategies even after transaction costs are considered.

Keywords: Economic conditions; Predictability; Trading activity; Variance swaps; Variance risk premium; Volatility trading (search for similar items in EconPapers)
JEL-codes: G13 G17 (search for similar items in EconPapers)
Date: 2014-10-27
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.qmul.ac.uk/sef/media/econ/research/wor ... 2014/items/wp732.pdf (application/pdf)

Related works:
Journal Article: How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns (2016)
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:qmw:qmwecw:732

Access Statistics for this paper

More papers in Working Papers from Queen Mary University of London, School of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Nicholas Owen ( this e-mail address is bad, please contact ).