Up- and Downside Variance Risk Premia in Global Equity Markets

44 Pages Posted: 4 Jun 2018

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: April 23, 2018

Abstract

This paper provides novel insights into the variance risk premium by disaggregating it into an upper and a lower parts. Across a set of global stock market indices, we find that the variance premium is almost exclusively driven by downside risk, i.e., by the left tail of the index return distribution. Considering the term structure of semivariance premia we reveal large differences in levels and slopes across different markets. Further, we condition the premia on several variables and find the upper premium to be non-zero only in bad states, while the lower premium exists in all states. Finally, we include different thresholds for decomposition of the total premium and observe that lower semivariance premia predominantly compensate investors for taking risks of large negative return innovations.

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 (April 23, 2018). 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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