Variance and Skew Risk Premiums for the Volatility Market: The VIX Evidence

30 Pages Posted: 20 Jul 2016 Last revised: 14 Aug 2017

See all articles by José Da Fonseca

José Da Fonseca

Auckland University of Technology - Faculty of Business & Law

Yahua Xu

Central University of Finance and Economics (CUFE) - China Economics and Management Academy

Date Written: August 14, 2017

Abstract

We extract variance and skew risk premiums from volatility derivatives in a model-free way and analyze their relationships along with volatility index and equity index returns. These risk premiums can be synthesized through option trading strategies. Using a time series of option prices on the VIX, the most liquid volatility derivative market, we find that variance swap excess return can be partially explained by volatility index and equity index excess returns while these latter variables carry little information for the skew swap excess return. The results sharply contrast with those obtained for the equity index option market underlining very specific characteristics of the volatility derivative market.

Keywords: VIX option market, variance swap, skew swap, risk premiums

JEL Classification: G11, G12, G13

Suggested Citation

Da Fonseca, José and Xu, Yahua, Variance and Skew Risk Premiums for the Volatility Market: The VIX Evidence (August 14, 2017). Available at SSRN: https://ssrn.com/abstract=2811433 or http://dx.doi.org/10.2139/ssrn.2811433

José Da Fonseca

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand
64 9 921 9999 5063 (Phone)

Yahua Xu (Contact Author)

Central University of Finance and Economics (CUFE) - China Economics and Management Academy ( email )

NO.39 South College Road
Haidian District
Beijing, 100081
China

Register to save articles to
your library

Register

Paper statistics

Downloads
216
Abstract Views
1,154
rank
142,471
PlumX Metrics