AbstractClassical capital asset pricing theory tells us that riskaverse investors would require higher returns to compensate for higher risk on an investment. One type of risk is price (return) risk, which reflects uncertainty in the price level and is measured by the volatility (standard deviation) of asset returns. Volatility itself is also known to be random and hence is perceived as another type of risk. Investors can bear price risk in exchange for a higher return. But are investors willing to pay a premium to enjoy lower volatility? In this essay, I try to answer this question by (1) introducing two different measures of volatility, (2) summarizing findings about volatility risk and its premiums in financial equity markets and (3) presenting preliminary research on volatility risk premiums in the markets for corn, wheat and soybeans, which are relevant to the South Dakota economy.
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Bibliographic InfoPaper provided by South Dakota State University, Department of Economics in its series Issue Briefs with number 2009513.
Length: 4 pages
Date of creation: Dec 2009
Date of revision:
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- Fei Ren & Gao-Feng Gu & Wei-Xing Zhou, 2009. "Scaling and memory in the return intervals of realized volatility," Papers 0904.1107, arXiv.org, revised Aug 2009.
- Xiao-Hui Ni & Zhi-Qiang Jiang & Gao-Feng Gu & Fei Ren & Wei Chen & Wei-Xing Zhou, 2009. "Scaling and memory in the non-poisson process of limit order cancelation," Papers 0911.0057, arXiv.org.
- X. F. Jiang & T. T. Chen & B. Zheng, 2013. "Time-reversal asymmetry in financial systems," Papers 1308.0669, arXiv.org.
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