Abstract

http://ssrn.com/abstract=2136820
 
 

Citations (2)



 


 



The Term Structure of Variance Swaps, Risk Premia and the Expectation Hypothesis


Yacine Ait-Sahalia


Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Mustafa Karaman


University of Zurich - Swiss Banking Institute (ISB)

Loriano Mancini


Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

August 24, 2012


Abstract:     
We study the term structure of variance swaps, which are popular volatility derivative contracts. A model-free analysis reveals a significant jump risk component embedded in variance swaps. The variance risk premium is negative and has a downward sloping term structure. Variance risk premia due to negative jumps present similar features in quiet times but have an upward sloping term structure in turbulent times. This suggests that short-term variance risk premia mainly reflect investors' fear of a market crash. Theoretically, the Expectation Hypothesis does not hold, but biases and inefficiencies are modest for short time horizons. A simple trading strategy with variance swaps generates significant returns.

Number of Pages in PDF File: 61

Keywords: variance swap, stochastic volatility, likelihood approximation, term structure, equity risk premium, variance risk premium, expectation hypothesis

JEL Classification: C51, G12, G13

working papers series


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Date posted: August 27, 2012  

Suggested Citation

Ait-Sahalia, Yacine and Karaman, Mustafa and Mancini, Loriano, The Term Structure of Variance Swaps, Risk Premia and the Expectation Hypothesis (August 24, 2012). Available at SSRN: http://ssrn.com/abstract=2136820 or http://dx.doi.org/10.2139/ssrn.2136820

Contact Information

Yacine Ait-Sahalia (Contact Author)
Princeton University - Department of Economics ( email )
Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Mustafa Karaman
University of Zurich - Swiss Banking Institute (ISB) ( email )
Plattenstrasse 32
Zurich, 8032
Switzerland
Loriano Mancini
Ecole Polytechnique Fédérale de Lausanne ( email )
Quartier UNIL-Dorigny
Bâtiment Extranef
1015 Lausanne, CH-1015
Switzerland
HOME PAGE: http://sfi.epfl.ch/mancini.html
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
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