The Term Structure of the Price of Variance Risk

34 Pages Posted: 7 Aug 2015 Last revised: 21 Jan 2025

See all articles by Marianne Andries

Marianne Andries

University of Southern California

Thomas M. Eisenbach

Federal Reserve Banks - 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. We estimate the aversion to variance risk in a stochastic-volatility option pricing model separately for options of different maturities and find that variance risk pricing decreases in absolute value with maturity but remains significantly different from zero up to the nine-month horizon. We find consistent non-parametric results using estimates from Sharpe ratios of delta-neutral straddles. We further show that the term structure is downward sloping both during normal times and in times of stress, when required compensation for variance risk increases and its term structure steepens 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. January 2025, 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
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Thomas M. Eisenbach (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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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

CEPR ( email )

London
United Kingdom

University of Oxford - Finance ( email )

United States

CESifo ( email )

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Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

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1000 Brussels
Belgium

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