The Term Structure of the Price of Variance Risk

22 Pages Posted: 7 Aug 2015 Last revised: 16 Jun 2023

See all articles by Marianne Andries

Marianne Andries

University of Southern California

Thomas M. Eisenbach

Federal Reserve Bank of New York

R. Jay Kahn

Board of Governors of the Federal Reserve System

Martin C. Schmalz

CEPR; University of Oxford - Finance; CESifo; European Corporate Governance Institute (ECGI)

Date Written: August 1, 2015

Abstract

We empirically investigate the term structure of variance risk pricing and how it varies over time. Estimating the price of variance risk in a stochastic-volatility option pricing model separately for options of different maturities, we find a price of variance risk that decreases in absolute value with maturity but remains significantly different from zero up to the nine-month horizon. We show that the term structure is consistently downward sloping both during normal times and in times of stress, when required compensation for variance risk increases and its term structure stepens further.

Keywords: volatility risk, option returns, term structure

JEL Classification: G12, G13

Suggested Citation

Andries, Marianne and Eisenbach, Thomas M. and Kahn, R. Jay and Schmalz, Martin C. and Schmalz, Martin C., The Term Structure of the Price of Variance Risk (August 1, 2015). FRB of New York Staff Report No. 736 Rev. June 2023, Available at SSRN: https://ssrn.com/abstract=2640193 or http://dx.doi.org/10.2139/ssrn.2640193

Marianne Andries

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Thomas M. Eisenbach (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6089 (Phone)

HOME PAGE: http://teisenbach.github.io/

R. Jay Kahn

Board of Governors of the Federal Reserve System ( email )

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

Martin C. Schmalz

University of Oxford - Finance ( email )

United States

CEPR ( email )

London
United Kingdom

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
462
Abstract Views
3,620
Rank
112,926
PlumX Metrics