Up- and Downside Variance Risk Premia in Global Equity Markets
44 Pages Posted: 4 Jun 2018
Date Written: April 23, 2018
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
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