Does Variance Risk Have Two Prices? Evidence from the Equity and Option Markets

48 Pages Posted: 15 Oct 2015

See all articles by Laurent Barras

Laurent Barras

Universite du Luxembourg - Department of Finance

Aytek Malkhozov

Queen Mary University of London - School of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 2015

Abstract

We formally compare two versions of the market Variance Risk Premium (VRP) measured in the equity and option markets. Both VRPs follow common patterns and respond similarly to changes in volatility and economic conditions. However, we reject the null hypothesis that they are identical and find that their difference is strongly related to measures of the financial standing of intermediaries. These results shed new light on the information content of the VRP, suggest the presence of market frictions between the two markets, and are consistent with the key role played by intermediaries in setting option prices.

Keywords: variance risk premium, option, equity, financial intermediaries

JEL Classification: G12, G13, C58

Suggested Citation

Barras, Laurent and Malkhozov, Aytek, Does Variance Risk Have Two Prices? Evidence from the Equity and Option Markets (October 2015). BIS Working Paper No. 521, Available at SSRN: https://ssrn.com/abstract=2673039

Laurent Barras (Contact Author)

Universite du Luxembourg - Department of Finance ( email )

L-1511 Luxembourg
Luxembourg

Aytek Malkhozov

Queen Mary University of London - School of Economics and Finance ( email )

Mile End Road
London, London E1 4NS
United Kingdom

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