Advanced Search
MyIDEAS: Login to save this article or follow this journal

Variance Risk-Premium Dynamics: The Role of Jumps

Contents:

Author Info

  • Viktor Todorov
Registered author(s):

    Abstract

    Using high-frequency stock market data and (synthetic) variance swap rates, this paper identifies and investigates the temporal variation in the market variance risk-premium. The variance risk is manifest in two salient features of financial returns: stochastic volatility and jumps. The pricing of these two components is analyzed in a general semiparametric framework. The key empirical results imply that investors' fears of future jumps are especially sensitive to recent jump activity and that their willingness to pay for protection against jumps increases significantly immediately after the occurrence of jumps. This in turn suggests that time-varying risk aversion, as previously documented in the literature, is primarily driven by large, or extreme, market moves. The dynamics of risk-neutral jump intensity extracted from deep out-of-the-money put options confirms these findings. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://hdl.handle.net/10.1093/rfs/hhp035
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 23 (2010)
    Issue (Month): 1 (January)
    Pages: 345-383

    as in new window
    Handle: RePEc:oup:rfinst:v:23:y:2010:i:1:p:345-383

    Contact details of provider:
    Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
    Fax: 919-677-1714
    Email:
    Web page: http://www.rfs.oupjournals.org/
    More information through EDIRC

    Order Information:
    Web: http://www4.oup.co.uk/revfin/subinfo/

    Related research

    Keywords:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Gonçalo Faria & João Correia-da-Silva, 2011. "A Closed-Form Solution for Options with Ambiguity about Stochastic Volatility," FEP Working Papers 414, Universidade do Porto, Faculdade de Economia do Porto.
    2. Worapree Maneesoonthorn & Gael M. Martin & Catherine S. Forbes & Simone Grose, 2010. "Probabilistic Forecasts of Volatility and its Risk Premia," Monash Econometrics and Business Statistics Working Papers 22/10, Monash University, Department of Econometrics and Business Statistics.
    3. Jakub W. Jurek & Erik Stafford, 2013. "The Cost of Capital for Alternative Investments," NBER Working Papers 19643, National Bureau of Economic Research, Inc.
    4. Li, Junye, 2012. "Option-implied volatility factors and the cross-section of market risk premia," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 249-260.
    5. Ammann, Manuel & Buesser, Ralf, 2013. "Variance Risk Premiums in Foreign Exchange Markets," Working Papers on Finance 1304, University of St. Gallen, School of Finance.
    6. Stanislav Khrapov, 2011. "Pricing Central Tendency in Volatility," Working Papers w0168, Center for Economic and Financial Research (CEFIR).
    7. Kuhnen, Camelia M., 2012. "Asymmetric learning from financial information," MPRA Paper 39412, University Library of Munich, Germany.
    8. Sévi, Benoît, 2013. "An empirical analysis of the downside risk-return trade-off at daily frequency," Economic Modelling, Elsevier, vol. 31(C), pages 189-197.
    9. Kelly, Bryan & Pástor, Luboš & Veronesi, Pietro, 2014. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," CEPR Discussion Papers 9822, C.E.P.R. Discussion Papers.
    10. Juan M. Londono, 2011. "The variance risk premium around the world," International Finance Discussion Papers 1035, Board of Governors of the Federal Reserve System (U.S.).
    11. Arash, Aloosh, 2011. "Variance Risk Premium Differentials and Foreign Exchange Returns," MPRA Paper 40829, University Library of Munich, Germany, revised 18 Aug 2012.
    12. Bakshi, Gurdip & Madan, Dilip & Panayotov, George, 2010. "Returns of claims on the upside and the viability of U-shaped pricing kernels," Journal of Financial Economics, Elsevier, vol. 97(1), pages 130-154, July.
    13. Ederington, Louis H. & Guan, Wei, 2013. "The cross-sectional relation between conditional heteroskedasticity, the implied volatility smile, and the variance risk premium," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3388-3400.
    14. Corradi, Valentina & Distaso, Walter & Mele, Antonio, 2013. "Macroeconomic determinants of stock volatility and volatility premiums," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 203-220.
    15. Geon Ho Choe & Kyungsub Lee, 2013. "High moment variations and their application," Papers 1311.4973, arXiv.org.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:23:y:2010:i:1:p:345-383. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.