Variance Swaps and Intertemporal Asset Pricing
AbstractThis paper proposes an ICAPM in which the risk premium embedded in variance swaps is the factor mimicking portfolio for hedging exposure to changes in future investment conditions. Recent empirical evidence shows that the fears by investors to deviations from Normality in the distribution of returns are able to explain time-varying financial and macroeconomic risks in addition to being a determinant of the variance risk premium. Moreover, variance swaps hedges unfavorable changes in the stochastic investment opportunity set, and is not a redundant asset because significantly expands the efficient mean-variance frontier. Thence, we should expect the variance swap risk incremental pricing information associated with the variance risk premium, particularly at shorter horizons.
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Bibliographic InfoPaper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 2011-08.
Length: 33 pages
Date of creation: 2011
Date of revision:
variance risk premium; intertemporal asset pricing;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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