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Up- and Downside Variance Risk Premia in Global Equity Markets

Author

Listed:
  • Matthias Held

    (Faculty of Finance, WHU - Otto Beisheim School of Management)

  • Marcel Omachel

    (Faculty of Finance, WHU - Otto Beisheim School of Management)

Abstract

This paper studies the variance risk premium from a new perspective by disaggregating the total premium into upper and lower semivariance premia. To this end, we provide novel tools for computing conditional expectations using traded options as well as moment generating functions. Across a dataset of global stock market indices, we find that the variance premium is almost exclusively driven by downside risk. Our results are robust with respect to the sample period. These findings substantiate the hypothesis found in the literature that the variance premium is largely driven by the left tail of the index return distribution.

Suggested Citation

  • Matthias Held & Marcel Omachel, 2014. "Up- and Downside Variance Risk Premia in Global Equity Markets," FEMM Working Papers 140009, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    • Handle: RePEc:mag:wpaper:140009
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    variance risk premium; semivariance; derivatives;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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