Variance and Skew Risk Premiums for the Volatility Market: The VIX Evidence
30 Pages Posted: 20 Jul 2016 Last revised: 14 Aug 2017
Date Written: August 14, 2017
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: Suggested Citation