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

See all articles by Fabian Hollstein

Fabian Hollstein

Leibniz University Hannover - School of Economics and Management

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Chardin Wese Simen

University of Liverpool Management School

Date Written: November 6, 2018

Abstract

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

Hollstein, Fabian and Prokopczuk, Marcel and Wese Simen, Chardin, The Term Structure of Systematic and Idiosyncratic Risk (November 6, 2018). Journal of Futures Markets (2019), Vol. 39(4), pp. 435–460, Available at SSRN: https://ssrn.com/abstract=3069519 or http://dx.doi.org/10.2139/ssrn.3069519

Fabian Hollstein (Contact Author)

Leibniz University Hannover - School of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Chardin Wese Simen

University of Liverpool Management School ( email )

Management School
University of Liverpool
Liverpool, L69 7ZH
United Kingdom

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