The Term Structure of Variance Swaps and Risk Premia
Princeton University - Department of Economics; National Bureau of Economic Research (NBER)
University of Zurich - Swiss Banking Institute (ISB)
Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
May 10, 2014
We study the term structure of variance swaps, equity and variance risk premia. A model-free analysis reveals a significant jump risk component embedded in variance swaps. A model-based analysis shows that the term structure of variance risk premia is negative and downward sloping. Investors' willingness to ensure against volatility risk increases after a market crash. This effect is stronger over short horizons and more persistent over long horizons. Based on our model estimates, during the financial crisis investors demanded large risk premia to hold equities but the risk premia largely depended and strongly decreased with the holding horizon.
Number of Pages in PDF File: 68
Keywords: Variance Swap, Stochastic Volatility, Likelihood Approximation, Term Structure, Equity Risk Premium, Variance Risk Premium
JEL Classification: C51, G12, G13working papers series
Date posted: August 27, 2012 ; Last revised: May 12, 2014
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