Up- and Downside Variance Risk Premia in Global Equity Markets

36 Pages Posted: 4 Jun 2018 Last revised: 3 Jun 2020

See all articles by Matthias Held

Matthias Held

WHU - Otto Beisheim School of Management

Julia Kapraun

Goethe University Frankfurt - House of Finance

Marcel Omachel

WHU - Otto Beisheim School of Management

Julian Thimme

Karlsruhe Institute of Technology

Date Written: May 20, 2020

Abstract

This paper provides novel insights into the dynamic properties of variance and semivariance premia. Considering nine international stock market indices, we find consistent evidence of significantly negative total and downside (semi)variance premia of around -15 bps per month. These premia almost exclusively compensate investors for the risk of extreme negative returns. We also document pronounced downside semivariance premia for longer times to maturity, while the term structure of the total variance premium is upward sloping for all of the considered indices. The slope is driven by upside semivariance premia which are positive over long horizons. They can only be negative in adverse states, characterized by high uncertainty and high risk aversion. We show that a general equilibrium model featuring external habit formation and “bad environment-good environment” dynamics for consumption and dividends can explain many of these stylized facts and highlight the economic mechanisms.

Keywords: variance risk premium, semivariance, semimoment, derivatives

JEL Classification: C32, G12, G15

Suggested Citation

Held, Matthias and Kapraun, Julia and Omachel, Marcel and Thimme, Julian, Up- and Downside Variance Risk Premia in Global Equity Markets (May 20, 2020). Available at SSRN: https://ssrn.com/abstract=3189480 or http://dx.doi.org/10.2139/ssrn.3189480

Matthias Held

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Julia Kapraun (Contact Author)

Goethe University Frankfurt - House of Finance ( email )

Theodor-W.-Adorno Platz 3
Frankfurt am Main, 60323
Germany

Marcel Omachel

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Julian Thimme

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

HOME PAGE: http://julianthimme.de

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