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Variance risk premiums and aging firms

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  • Neururer, Thaddeus

Abstract

In this paper, I investigate how variance risk premiums change as firms age. Negative variance risk premiums represent profits that, on average, accrue to traders willing to sell option protection to other investors. Although typical risk measures decrease as firms age, my results suggest that as firms become older their variance risk premiums decrease. This effect is not explained by option-implied risk measures, fundamental factors, and an option mispricing proxy. This result is also robust across several sample splits based on option market liquidity and the result is not explained by initial public offerings.

Suggested Citation

  • Neururer, Thaddeus, 2023. "Variance risk premiums and aging firms," Finance Research Letters, Elsevier, vol. 58(PA).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323006840
    DOI: 10.1016/j.frl.2023.104312
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    References listed on IDEAS

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    1. Ľuboš Pástor & Veronesi Pietro, 2003. "Stock Valuation and Learning about Profitability," Journal of Finance, American Finance Association, vol. 58(5), pages 1749-1789, October.
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    3. Thaddeus Neururer & George Papadakis & Edward J. Riedl, 2020. "The Effect of Reporting Streaks on Ex Ante Uncertainty," Management Science, INFORMS, vol. 66(8), pages 3771-3787, August.
    4. Goyal, Amit & Saretto, Alessio, 2009. "Cross-section of option returns and volatility," Journal of Financial Economics, Elsevier, vol. 94(2), pages 310-326, November.
    5. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    6. DeMiguel, Victor & Plyakha, Yuliya & Uppal, Raman & Vilkov, Grigory, 2013. "Improving Portfolio Selection Using Option-Implied Volatility and Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(6), pages 1813-1845, December.
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    More about this item

    Keywords

    Options; Firm age; Implied volatilities; Variance risk premiums; Risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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