Risk Premia and the VIX Term Structure

50 Pages Posted: 11 Jan 2015 Last revised: 17 Oct 2018

Date Written: January 27, 2016

Abstract

The shape of the VIX term structure conveys information about the price of variance risk rather than expected changes in the VIX, a rejection of the expectations hypothesis. A single principal component, Slope, summarizes nearly all this information, predicting the excess returns of S&P 500 variance swaps, VIX futures, and S&P 500 straddles for all maturities and to the exclusion of the rest of the term structure. Slope's predictability is incremental to other proxies for the conditional variance risk premia, is economically significant, and can only partially be explained by variations in observable risk measures.

Keywords: VIX, variance risk, term structure, expectations hypothesis, variance swaps, VIX futures, straddles

JEL Classification: G10, G11, G12, G13

Suggested Citation

Johnson, Travis L., Risk Premia and the VIX Term Structure (January 27, 2016). Journal of Financial and Quantitative Analysis 52 (2017), 2461-2490. Available at SSRN: https://ssrn.com/abstract=2548050 or http://dx.doi.org/10.2139/ssrn.2548050

Travis L. Johnson (Contact Author)

The University of Texas at Austin ( email )

2110 Speedway Stop B6600
Austin, TX Texas 78712
United States
6178995325 (Phone)

HOME PAGE: http://travislakejohnson.com

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