The Term Structure of Systematic and Idiosyncratic Risk
Journal of Futures Markets (2019), Vol. 39(4), pp. 435–460
70 Pages Posted: 14 Nov 2017 Last revised: 18 Sep 2019
Date Written: November 6, 2018
We study the term structure of variance (total risk), systematic, and idiosyncratic risk. Consistent with the expectations hypothesis, we find that, for the entire market, the slope of the term structure of variance is mainly informative about the path of future variance. Thus, there is little indication of a time-varying term premium. Turning the focus to individual stocks, we cannot reject the expectations hypothesis for systematic variance, but we strongly reject it for idiosyncratic variance. Our results are robust to jumps and potential statistical biases.
Keywords: Systematic risk, idiosyncratic risk, options, term structure, expectations hypothesis, model-free option implied variance, implied correlation
JEL Classification: G12, G11, G17
Suggested Citation: Suggested Citation