The Price of Variance Risk

74 Pages Posted: 26 Jul 2014 Last revised: 9 Oct 2015

See all articles by Ian Dew-Becker

Ian Dew-Becker

Kellogg School of Management - Department of Finance

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Anh Le

Penn State University Smeal College of Business

Marius Rodriguez

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: April 29, 2015

Abstract

In the period 1996-2014, the average investor in the variance swap market was indifferent to news about future variance at horizons ranging from 1 month to 14 years. It is only purely transitory and unexpected realized variance that were priced. These results present a challenge to most structural models of the variance risk premium, such as the intertemporal CAPM, recent models with Epstein-Zin preferences and long-run risks, and models where institutional investors have value-at-risk constraints. The results also have strong implications for macro models where volatility affects investment decisions, suggesting that investors are not willing to pay to hedge shocks in expected economic uncertainty.

Keywords: variance swaps, volatility pricing, VIX, asset pricing, disasters

JEL Classification: G12

Suggested Citation

Dew-Becker, Ian and Giglio, Stefano and Le, Anh and Rodriguez, Marius, The Price of Variance Risk (April 29, 2015). Chicago Booth Research Paper No. 15-31; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=2471079 or http://dx.doi.org/10.2139/ssrn.2471079

Ian Dew-Becker

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

Stefano Giglio (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Anh Le

Penn State University Smeal College of Business ( email )

Business Building
University Park, PA 16801
United States

Marius Rodriguez

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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