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
February 6, 2015
We study the term structure of variance swaps, equity and variance risk premia. A model-free analysis reveals a significant price jump component in variance swap rates. A model-based analysis shows that investors' willingness to ensure against volatility risk increases after a market drop. This effect is stronger for short horizons and more persistent for long horizons. 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. The term structure of equity and variance risk premia responds differently to various economic indicators.
Number of Pages in PDF File: 67
Keywords: Variance Swap, Stochastic Volatility, Likelihood Approximation, Term Structure, Equity Risk Premium, Variance Risk Premium
JEL Classification: C51, G12, G13
Date posted: August 27, 2012 ; Last revised: February 13, 2015
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