How Should the Long-term Investor Harvest Variance Risk Premiums?

49 Pages Posted: 20 Dec 2021

See all articles by Julian Dörries

Julian Dörries

University of Goettingen (Göttingen)

Olaf Korn

University of Goettingen (Göttingen)

Gabriel Power

Université Laval - Département de Finance et Assurance

Date Written: December 20, 2021

Abstract

Derivatives strategies that aim to earn variance risk premiums are exposed to sharp price declines during market crises, calling into question their suitability for the long-term investor. Our paper defines, analyzes and proposes potential solutions to three problems (payoff, leverage and finite maturity) linked to designing suitable variance-based investment strategies. We conduct an empirical study of such strategies for the S&P 500 index options market, and find strong effects of certain design elements on risk and return. Overall, our results show that variance strategies can be attractive to the long-term investor if properly designed.

Keywords: Variance Risk Premium, Variance Factor, Trading Strategies, Long-term Investor

JEL Classification: G10,G11,G23

Suggested Citation

Dörries, Julian and Korn, Olaf and Power, Gabriel, How Should the Long-term Investor Harvest Variance Risk Premiums? (December 20, 2021). Available at SSRN: https://ssrn.com/abstract=3989529 or http://dx.doi.org/10.2139/ssrn.3989529

Julian Dörries (Contact Author)

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Olaf Korn

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany
++49 551 39 7265 (Phone)
++49 551 39 7665 (Fax)

Gabriel Power

Université Laval - Département de Finance et Assurance ( email )

Pavillon Palasis-Prince
Quebec G1K 7P4
Canada

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