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The Term Structure of Variance Swaps and Risk Premia

Author

Listed:
  • Yacine Ait-Sahalia

    (Princeton University and National Bureau of Economic Research (NBER))

  • Mustafa Karaman

    (University of Zurich)

  • Loriano Mancini

    (University of Lugano and Swiss Finance Institute)

Abstract

We study the term structure of variance swaps, equity and variance risk premia. A model-free analysis reveals a significant price jump component in variance swap rates. A model-based analysis shows that investors' willingness to ensure against volatility risk increases after a market drop. This effect is stronger for short horizons and more persistent for long horizons. During the financial crisis investors demanded large risk premia to hold equities but the risk premia largely depended and strongly decreased with the holding horizon. The term structure of equity and variance risk premia responds differently to various economic indicators.

Suggested Citation

  • Yacine Ait-Sahalia & Mustafa Karaman & Loriano Mancini, 2018. "The Term Structure of Variance Swaps and Risk Premia," Swiss Finance Institute Research Paper Series 18-37, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1837
    as

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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2136820
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    Citations

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    Cited by:

    1. Danilo Cascaldi-Garcia & Cisil Sarisoy & Juan M. Londono & Bo Sun & Deepa D. Datta & Thiago Ferreira & Olesya Grishchenko & Mohammad R. Jahan-Parvar & Francesca Loria & Sai Ma & Marius Rodriguez & Ilk, 2023. "What Is Certain about Uncertainty?," Journal of Economic Literature, American Economic Association, vol. 61(2), pages 624-654, June.
    2. Finta, Marinela Adriana & Aboura, Sofiane, 2020. "Risk premium spillovers among stock markets: Evidence from higher-order moments," Journal of Financial Markets, Elsevier, vol. 49(C).
    3. Lieven Baele & Geert Bekaert & Koen Inghelbrecht & Min Wei, 2020. "Flights to Safety," The Review of Financial Studies, Society for Financial Studies, vol. 33(2), pages 689-746.
    4. M.E. Mancino & S. Scotti & G. Toscano, 2020. "Is the Variance Swap Rate Affine in the Spot Variance? Evidence from S&P500 Data," Applied Mathematical Finance, Taylor & Francis Journals, vol. 27(4), pages 288-316, July.
    5. Geert Bekaert & Eric Engstrom & Andrey Ermolov, 2023. "The Variance Risk Premium in Equilibrium Models," Review of Finance, European Finance Association, vol. 27(6), pages 1977-2014.
    6. Alexander, Carol & Rauch, Johannes, 2021. "A general property for time aggregation," European Journal of Operational Research, Elsevier, vol. 291(2), pages 536-548.
    7. Manuel Ammann & Mathis Mörke, 2019. "Credit Variance Risk Premiums," Working Papers on Finance 1908, University of St. Gallen, School of Finance.
    8. Rombouts, Jeroen V.K. & Stentoft, Lars & Violante, Francesco, 2020. "Dynamics of variance risk premia: A new model for disentangling the price of risk," Journal of Econometrics, Elsevier, vol. 217(2), pages 312-334.
    9. 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.).
    10. Fabian Hollstein & Marcel Prokopczuk & Chardin Wese Simen, 2019. "The term structure of systematic and idiosyncratic risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(4), pages 435-460, April.
    11. Karamfil Todorov, 2021. "Passive funds affect prices: evidence from the most ETF-dominated asset classes," BIS Working Papers 952, Bank for International Settlements.
    12. Park, Yang-Ho, 2020. "Variance disparity and market frictions," Journal of Econometrics, Elsevier, vol. 214(2), pages 326-348.
    13. Anqi Zou & Jiajie Wang & Chiye Wu, 2023. "Pricing Variance Swaps under MRG Model with Regime-Switching: Discrete Observations Case," Mathematics, MDPI, vol. 11(12), pages 1-30, June.

    More about this item

    Keywords

    Variance Swap; Stochastic Volatility; Likelihood Approximation; Term Structure; Equity Risk Premium; Variance Risk Premium;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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