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Does variance risk have two prices? Evidence from the equity and option markets

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  • Barras, Laurent
  • Malkhozov, Aytek

Abstract

We formally compare two versions of the market variance risk premium (VRP) measured in the equity and option markets. Both VRPs follow common patterns and respond similarly to changes in volatility and economic conditions. However, we reject the null hypothesis that they are identical and find that their difference is strongly related to measures of the financial standing of intermediaries. These results shed new light on the information content of the VRP, suggest the presence of market frictions between the two markets, and are consistent with the key role played by intermediaries in setting option prices.

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  • Barras, Laurent & Malkhozov, Aytek, 2016. "Does variance risk have two prices? Evidence from the equity and option markets," Journal of Financial Economics, Elsevier, vol. 121(1), pages 79-92.
    • Handle: RePEc:eee:jfinec:v:121:y:2016:i:1:p:79-92
    DOI: 10.1016/j.jfineco.2016.02.014
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    11. Yang-Ho Park, 2019. "Variance Disparity and Market Frictions," Finance and Economics Discussion Series 2019-059, Board of Governors of the Federal Reserve System (U.S.).
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    More about this item

    Keywords

    Variance risk premium; Option; Equity; Financial intermediaries;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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