Quantifying the Variance Risk Premium in VIX Options
18 Pages Posted: 12 Jan 2012
Date Written: January 11, 2012
This paper uses synthetically created variance swaps on VIX futures to quantify the variance risk premium in VIX options. The results of this methodology suggest that the average premium is -3.26%, meaning that the realized variance on VIX futures is on average less than the variance implied by the swap rate. This premium does not vary with time or the level of the swap rate as much as premiums in other asset classes. A negative risk premium implies that VIX option strategies that are net credit should be profitable.
Keywords: Variance risk premium, VIX, Options
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