The Term Structure of the Price of Variance Risk
22 Pages Posted: 7 Aug 2015 Last revised: 16 Jun 2023
Date Written: August 1, 2015
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: Suggested Citation