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Risk Premium, Variance Premium, and the Maturity Structure of Uncertainty

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  • Bruno Feunou
  • Jean-Sébastien Fontaine
  • Abderrahim Taamouti
  • Roméo Tédongap

Abstract

Structural or no-arbitrage asset-pricing models emphasize risk factors that cannot be observed directly. We show that the term structure of risk implicit in option prices can reveal these risk factors. Empirically, the variance term structure reveals two predictors of the bond premium, the equity premium, and the variance premium, jointly. Similarly, the term structures of skewness and kurtosis measures also reveal risk factors, but these are subsumed in the predictive content of the variance. The predicted premium is countercyclical and robust to the inclusion of known returns predictors.

Suggested Citation

  • Bruno Feunou & Jean-Sébastien Fontaine & Abderrahim Taamouti & Roméo Tédongap, 2014. "Risk Premium, Variance Premium, and the Maturity Structure of Uncertainty," Review of Finance, European Finance Association, vol. 18(1), pages 219-269.
  • Handle: RePEc:oup:revfin:v:18:y:2014:i:1:p:219-269.
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    Cited by:

    1. Bruno Feunou & Mohammad R Jahan-Parvar & Cédric Okou, 2018. "Downside Variance Risk Premium," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 16(3), pages 341-383.
    2. Jianjian Jin, 2013. "Jump-Diffusion Long-Run Risks Models, Variance Risk Premium and Volatility Dynamics," Staff Working Papers 13-12, Bank of Canada.
    3. repec:eee:quaeco:v:66:y:2017:i:c:p:275-293 is not listed on IDEAS
    4. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    5. Hollstein, Fabian & Prokopczuk, Marcel & Wese Simen, Chardin, 2017. "The Term Structure of Systematic and Idiosyncratic Risk," Hannover Economic Papers (HEP) dp-618, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    6. repec:eee:jbfina:v:84:y:2017:i:c:p:41-52 is not listed on IDEAS
    7. repec:eee:jbfina:v:82:y:2017:i:c:p:1-19 is not listed on IDEAS
    8. Gomes, Pedro & Taamouti, Abderrahim, 2016. "In search of the determinants of European asset market comovements," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 103-117.

    More about this item

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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