Relative Pricing and Risk Premia in Equity Volatility Markets

66 Pages Posted: 11 Oct 2018

See all articles by Peter Van Tassel

Peter Van Tassel

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: September 2018

Abstract

This paper provides empirical evidence that volatility markets are integrated through the time-varying term structure of variance risk premia. These risk premia predict the returns from selling volatility for different horizons, maturities, and products, including variance swaps, straddles, and VIX futures. In addition, the paper derives a closed-form relationship between the prices of variance swaps and VIX futures. While tightly linked, VIX futures exhibit deviations of varying significance from the no-arbitrage prices and bounds implied by the variance swap market. The paper examines these pricing errors and their relationship to VIX futures’ return predictability.

Keywords: variance swaps, term structure, variance risk premium, VIX futures, options, return predictability

JEL Classification: C58, G12, G13

Suggested Citation

Van Tassel, Peter, Relative Pricing and Risk Premia in Equity Volatility Markets (September 2018). FRB of New York Staff Report No. 867, Available at SSRN: https://ssrn.com/abstract=3259918 or http://dx.doi.org/10.2139/ssrn.3259918

Peter Van Tassel (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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