Abstract

http://ssrn.com/abstract=2136820
 
 

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The Term Structure of Variance Swaps and Risk Premia


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

May 10, 2014


Abstract:     
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, G13

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Date posted: August 27, 2012 ; Last revised: May 12, 2014

Suggested Citation

Ait-Sahalia, Yacine and Karaman, Mustafa and Mancini, Loriano, The Term Structure of Variance Swaps and Risk Premia (May 10, 2014). 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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