Variance Risk Premiums

Posted: 17 Mar 2009

See all articles by Peter Carr

Peter Carr

New York University Finance and Risk Engineering

Liuren Wu

City University of New York, CUNY Baruch College - Zicklin School of Business

Date Written: March 2009

Abstract

We propose a direct and robust method for quantifying the variance risk premium on financial assets. We show that the risk-neutral expected value of return variance, also known as the variance swap rate, is well approximated by the value of a particular portfolio of options. We propose to use the difference between the realized variance and this synthetic variance swap rate to quantify the variance risk premium. Using a large options data set, we synthesize variance swap rates and investigate the historical behavior of variance risk premiums on five stock indexes and 35 individual stocks.

Keywords: G10, G12, G13

Suggested Citation

Carr, Peter P. and Wu, Liuren, Variance Risk Premiums (March 2009). The Review of Financial Studies, Vol. 22, Issue 3, pp. 1311-1341, 2009. Available at SSRN: https://ssrn.com/abstract=1359527 or http://dx.doi.org/hhn038

Peter P. Carr

New York University Finance and Risk Engineering ( email )

6 MetroTech Center
Brooklyn, NY 11201
United States
9176217733 (Phone)

HOME PAGE: http://engineering.nyu.edu/people/peter-paul-carr

Liuren Wu

City University of New York, CUNY Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-247
New York, NY 10010
United States
646-312-3509 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://faculty.baruch.cuny.edu/lwu/

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,396
PlumX Metrics