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Equity Volatility Term Premia

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Abstract

Investors can buy volatility hedges on the stock market using variance swaps or VIX futures. One motivation for hedging volatility is its negative relationship with the stock market. When volatility increases, stock returns tend to decline contemporaneously, a result known as the leverage effect. In this post, we measure the cost of volatility hedging by decomposing the prices of variance swaps and VIX futures into volatility forecasts and estimates of expected returns (“equity volatility term premia”) from January 1996 to June 2020.

Suggested Citation

  • Charles Smith & Peter Van Tassel, 2021. "Equity Volatility Term Premia," Liberty Street Economics 20210203, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:89758
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    Cited by:

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    2. Peter Van Tassel, 2020. "The Law of One Price in Equity Volatility Markets," Staff Reports 953, Federal Reserve Bank of New York.

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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