The Term Structure of the Price of Variance Risk
Thomas Eisenbach (),
Martin Schmalz and
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Yichuan Wang: University of Michigan
No 1641, 2017 Meeting Papers from Society for Economic Dynamics
We estimate the term structure of the price of variance risk (PVR), which helps distinguish between competing asset-pricing theories. First, we measure the PVR as proportional to the Sharpe ratio of short-term holding returns of delta-neutral index straddles; second, we estimate the PVR in a Heston (1993) stochastic-volatility model. In both cases, the estimation is performed separately for different maturities. We find the PVR is negative and decreases in absolute value with maturity; it is more negative and its term structure is steeper when volatility is high. These findings are inconsistent with calibrations of established asset-pricing models that assume constant risk aversion across maturities.
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Working Paper: The term structure of the price of variance risk (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1641
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