Risk Premia and the VIX Term Structure
50 Pages Posted: 11 Jan 2015 Last revised: 14 Jan 2017
Date Written: January 27, 2016
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: Suggested Citation