The Price of Variance Risk

Abstract

At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w21182.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The term structure of systematic and idiosyncratic risk

“…Our results of the expectations hypothesis tests are also weaker for short horizons. Thus, these results are ultimately consistent with those of Dew‐Becker et al () and Johnson ().…”

“…Second, Johnson () concentrates on short horizons. Dew‐Becker et al () show that the variance term structure is only upward‐sloping at the very short end: There is a large difference between the shortest term implied variance and that with 1–2 months to maturity. Our results of the expectations hypothesis tests are also weaker for short horizons.…”

“…Ait‐Sahalia, Karaman, and Mancini () extend the work of Egloff, Leippold, and Wu (), modeling the term structure of variance swaps in a continuous time setup. Further papers that model the term structure of variance swap rates include Amengual and Xiu (), Andries, Eisenbach, Schmalz, and Wang (), Dew‐Becker, Giglio, Le, and Rodriguez (), and Filipović, Gourier, and Mancini ().…”

Option-Implied Term Structures

“…This is the result of predictive regressions that additively decompose longrun VRP into the sum of one-month VRP and a forward VRP that represents compensation that investors earn for exposure to variance risk beyond the first month. The predictive results connect the findings of Dew-Becker, Giglio, Le, and Rodriguez (2015) and Andries, Eisenbach, Schmalz, and Wang (2015) to the findings of van Binsbergen, Brandt, and Koijen (2012) by showing that kurtosis option-spanning portfolios that are based on the spanning theorems of Bakshi and Madan (2000).discount rates for short-term variance cash flows are tightly linked to those of the equity term structure, which in turn are tied to discount rates of short-term dividend cash flows.…”

“…the VIX term structure). The paper's empirical focus on variance is therefore motivated by the factor structure result on higher order moments, as well as recent research on the term structure of variance risk premia: by examining Sharpe ratios of trading strategies that effectively sell variance along its term structure, Dew-Becker, Giglio, Le, and Rodriguez (2015) have found that only news about short-run realized variance is priced. In related work, Andries, Eisenbach, Schmalz, and Wang (2015) use the Heston (1993) model and a short option straddle to estimate the term structure of variance risk premia, an object also studied in Aït-Sahalia, Karaman, and Mancini (2015), who find a significant pricejump component in their own estimated term structure of variance risk premia.…”