Variance Swaps and Intertemporal Asset Pricing

Belén Nieto (), Alfonso Novales and Gonzalo Rubio ()
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Belén Nieto: Departamento de Economía Financiera y Contabilizad, Universidad de Alicante, https://web.ua.es/es/researchgroupmffe/investigadores/nietodomenech.html
Gonzalo Rubio: Universidad CEU Cardenal Herrera, https://www.ucm.es/icae

No 2011-08, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: This paper proposes an ICAPM in which the risk premium embedded in variance swaps is the factor mimicking portfolio for hedging exposure to changes in future investment conditions. Recent empirical evidence shows that the fears by investors to deviations from Normality in the distribution of returns are able to explain time-varying financial and macroeconomic risks in addition to being a determinant of the variance risk premium. Moreover, variance swaps hedges unfavorable changes in the stochastic investment opportunity set, and is not a redundant asset because significantly expands the efficient mean-variance frontier. Thence, we should expect the variance swap risk incremental pricing information associated with the variance risk premium, particularly at shorter horizons.

Keywords: variance risk premium; intertemporal asset pricing (search for similar items in EconPapers)
JEL-codes: C13 C14 G10 G12 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2011
New Economics Papers: this item is included in nep-rmg
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