IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/20834.html

Equilibrium VIX in Inelastic Markets

Author

Listed:
  • Menkveld, Albert J.

Abstract

On average, the squared VIX exceeds realized variance. This implies that investors pay a premium to hold variance risk. But, why *pay* for risk? And, why does the premium correlate with volume? In Grossman-Miller type inelastic markets, investors hold variance risk to hedge against liquidity shocks, because these shocks cause price pressures that add to realized variance. Therefore, a positive variance risk premium must emerge in equilibrium. This result is developed formally, and the model is calibrated to match empirical patterns in the variance risk premium and trading volume around eleven crises between 1993 and 2025.

Suggested Citation

  • Menkveld, Albert J., 2025. "Equilibrium VIX in Inelastic Markets," CEPR Discussion Papers 20834, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20834
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP20834
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:20834. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CEPR (email available below). General contact details of provider: https://cepr.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.