Does Variance Risk Have Two Prices? Evidence from the Equity and Option Markets

Journal of Financial Economics, Forthcoming

34 Pages Posted: 6 Jun 2014 Last revised: 19 Mar 2016

See all articles by Laurent Barras

Laurent Barras

McGill University - Desautels Faculty of Management

Aytek Malkhozov

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: September 14, 2015

Abstract

We formally compare two versions of the market Variance Risk Premium (VRP) measured in the equity and option markets. Both VRPs follow common patterns and respond similarly to changes in volatility and economic conditions. However, we reject the null hypothesis that they are identical and Â…find that their difference is strongly related to measures of the financial standing of intermediaries. These results shed new light on the information content of the VRP, suggest the presence of market frictions between the two markets, and are consistent with the key role played by intermediaries in setting option prices.

Keywords: Variance Risk Premium, Option, Equity, Financial Intermediaries

JEL Classification: G12, G13, C58

Suggested Citation

Barras, Laurent and Malkhozov, Aytek, Does Variance Risk Have Two Prices? Evidence from the Equity and Option Markets (September 14, 2015). Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2442068 or http://dx.doi.org/10.2139/ssrn.2442068

Laurent Barras

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
+15143988862 (Phone)

Aytek Malkhozov (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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