The Term Structure of Variance Swaps and Risk Premia

67 Pages Posted: 27 Aug 2012 Last revised: 13 Feb 2015

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; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Date Written: February 6, 2015

Abstract

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.

Keywords: Variance Swap, Stochastic Volatility, Likelihood Approximation, Term Structure, Equity Risk Premium, Variance Risk Premium

JEL Classification: C51, G12, G13

Suggested Citation

Ait-Sahalia, Yacine and Karaman, Mustafa and Mancini, Loriano, The Term Structure of Variance Swaps and Risk Premia (February 6, 2015). Available at SSRN: https://ssrn.com/abstract=2136820 or http://dx.doi.org/10.2139/ssrn.2136820

Yacine Ait-Sahalia (Contact Author)

National Bureau of Economic Research (NBER)

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Princeton University - Department of Economics ( email )

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609-258-4015 (Phone)
609-258-5398 (Fax)

Mustafa Karaman

University of Zurich - Swiss Banking Institute (ISB) ( email )

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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

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
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1211 Geneva, CH-6900
Switzerland

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