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Variance Risk Premia

Listed author(s):
  • Peter Carr

    (New York University & Bloomberg)

  • Liuren Wu

    (Zicklin School of Business, Baruch College)

We propose a direct and robust method for quantifying the variance risk premium on financial assets. We theoretically and numerically show that the risk-neutral expected value of the return variance, also known as the variance swap rate, is well approximated by the value of a particular portfolio of options. Ignoring the small approximation error, the difference between the realized variance and this synthetic variance swap rate quantifies the variance risk premium. Using a large options data set, we synthesize variance swap rates and investigate the historical behavior of variance risk premia on five stock indexes and 35 individual stocks.

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File URL: http://econwpa.repec.org/eps/fin/papers/0409/0409015.pdf
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Paper provided by EconWPA in its series Finance with number 0409015.

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Length: 60 pages
Date of creation: 07 Sep 2004
Handle: RePEc:wpa:wuwpfi:0409015
Note: Type of Document - pdf; pages: 60
Contact details of provider: Web page: http://econwpa.repec.org

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