Variance Risk: A Bird's Eye View

77 Pages Posted: 19 Sep 2019 Last revised: 14 Jan 2021

See all articles by Fabian Hollstein

Fabian Hollstein

Saarland University

Chardin Wese Simen

University of Liverpool Management School

Date Written: September 10, 2019


The literature documents a significantly negative average variance swap payoff (VSP) for the S&P 500 index but generally not for the constituent stocks. We show that this result is affected by biases arising from (i) an intraday momentum effect and (ii) the use of an incoherent measure of return variation. Accounting for these issues, we find stronger evidence of a significant average VSP both at the index level and also for equities. We decompose the index variance risk premium (VRP) into factors related to the VRP of equities and the correlation risk premium (CRP) and assess their predictive power for aggregate stock returns.

Keywords: Correlation Swaps, Return Predictability, Return Variation, Variance Swaps

JEL Classification: G11, G12

Suggested Citation

Hollstein, Fabian and Wese Simen, Chardin, Variance Risk: A Bird's Eye View (September 10, 2019). Journal of Econometrics (2020), Vol. 215(2), pp. 517-535., Available at SSRN:

Fabian Hollstein (Contact Author)

Saarland University ( email )

Saarbrucken, Saarland D-66123

Chardin Wese Simen

University of Liverpool Management School ( email )

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

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics