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How Does The Market Variance Risk Premium Vary Over Time Evidence From Sp 500 Variance Swap Investment Returns
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Book Synopsis How Does the Market Variance Risk Premium Vary Over Time? Evidence from S&P 500 Variance Swap Investment Returns by : Eirini Konstantinidi
Download or read book How Does the Market Variance Risk Premium Vary Over Time? Evidence from S&P 500 Variance Swap Investment Returns written by Eirini Konstantinidi and published by . This book was released on 2015 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We explore whether the market variance risk premium (VRP) can be predicted. We measure VRP by distinguishing the investment horizon from the variance swap's maturity. We extract VRP from actual S&P 500 variance swap quotes and we test four classes of predictive models. We find that the best performing model is the one that conditions on trading activity. This relation is also economically significant. Volatility trading strategies which condition on trading activity outperform popular benchmark strategies, even once we consider transaction costs. Our finding implies that broker dealers command a greater VRP to continue holding short positions in index options in the case where trading conditions deteriorate.
Book Synopsis Variance Risk Premium Demystified by : Grigory Vilkov
Download or read book Variance Risk Premium Demystified written by Grigory Vilkov and published by . This book was released on 2008 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the dynamics and cross-sectional properties of the variance risk premia embedded in options on stocks and indices, approximated by the synthetic variance swap returns. Several important stylized facts and contributions arise. First, variance risk premia for indices are systematically larger (more negative) than for individual securities. Second, there are systematic cross-sectional differences in the price of variance in individual stocks. Linking variance swaps to firm size/book-to-market, and stock turnover characteristics, an investor gains access to several lucrative long-short strategies with Sharpe Ratios around 2.85. Third, principal component analysis reveals at most one important factor driving both stock and variance swap returns, which corresponds to the traditional market factor. For the remainder of the dynamics, the stock and its variance processes are nearly linearly independent. Fourth, we find the leverage effect through analysis of the relationship between the variance risk premium and stock to variance correlation. The systematic (market factor) part of the leverage effect provides additional evidence of the existence of one factor common to both variance swaps and stocks, but the contribution of the market risk premium to the total variance premium is very small. These findings stress the importance of using variance-based instruments in the portfolio of an investor.
Book Synopsis Variance and Skew Risk Premiums for the Volatility Market by : José Da Fonseca
Download or read book Variance and Skew Risk Premiums for the Volatility Market written by José Da Fonseca and published by . This book was released on 2017 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: We extract variance and skew risk premiums from volatility derivatives in a model-free way and analyze their relationships along with volatility index and equity index returns. These risk premiums can be synthesized through option trading strategies. Using a time series of option prices on the VIX, the most liquid volatility derivative market, we find that variance swap excess return can be partially explained by volatility index and equity index excess returns while these latter variables carry little information for the skew swap excess return. The results sharply contrast with those obtained for the equity index option market underlining very specific characteristics of the volatility derivative market.
Book Synopsis Variance Risk Dynamics, Variance Risk Premia, and Optimal Variance Swap Investments by : Markus Leippold
Download or read book Variance Risk Dynamics, Variance Risk Premia, and Optimal Variance Swap Investments written by Markus Leippold and published by . This book was released on 2007 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: With increasing appreciation of the fact that stock return variance is stochastic and variance risk is heavily priced, the industry has created a series of variance derivative products to span variance risk. The variance swap contract is the most actively traded of these products. It pays at expiry the difference between the realized return variance and a fixed rate, called the variance swap rate, determined at the inception of the contract. We obtain a decade worth of variance swap rate quotes at five maturities. With the data, we first exploit the information in both the time series and the term structure of the variance swap rates to analyze the return variance rate dynamics and market pricing of variance risk. We then study both theoretically and empirically how investors can use variance swap contracts across different maturities to span the variance risk and to revise their dynamic asset allocation decisions. We find that with the swap contract to span the variance risk, an investor increases her investment in the underlying stock.In addition, the investor's indirect utility increases significantly when allowed to span the volatility risk using variance swap contracts. Finally, an out-of-sample study confirms that the gains from including variance swaps into the portfolio mix are large.
Download or read book Variance Dynamics written by Liuren Wu and published by . This book was released on 2005 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: With a portfolio of options on Samp;P 500 index, the Chicago Board of Options Exchange constructs a volatility index named VIX that approximates the 30-day return variance swap rate on the index. Using high-frequency return data, researchers have proposed various return quadratic variation estimators. This paper estimates the index return variance dynamics and variance risk premium jointly from the VIX index and various quadratic variation estimators constructed from tick data on Samp;P 500 index futures. Estimation shows that the index return variance jumps. The jump arrival rate is not constant over time, but proportional to the variance rate level. Furthermore, jumps in the index return variance are not rare events, but arrive frequently and generate sample paths that show infinite variation. Estimation also identifies a strongly negative variance risk premium, the absolute magnitude of which is proportional to the variance rate level. Finally, the estimation highlights the importance and necessity for removing microstructure noise in estimating quadratic variations.
Book Synopsis Jump and Variance Risk Premia in the S&P 500 by : Maximilian Neumann
Download or read book Jump and Variance Risk Premia in the S&P 500 written by Maximilian Neumann and published by . This book was released on 2019 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the risk premia embedded in the S&P 500 spot index and option markets. We use a long time-series of spot prices and a large panel of option prices to jointly estimate the diffusive stock risk premium, the Price jump risk premium, the diffusive variance risk premium and the variance jump risk premium. The risk premia are statistically and economically significant and move over time. Investigating the economic drivers of the risk premia, we are able to explain up to 63% of these variations.
Book Synopsis Risk Premium, Variance Premium and the Maturity Structure of Uncertainty by : Bruno Feunou
Download or read book Risk Premium, Variance Premium and the Maturity Structure of Uncertainty written by Bruno Feunou and published by . This book was released on 2012 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Variance Risk Premium by : Junye Li
Download or read book The Variance Risk Premium written by Junye Li and published by . This book was released on 2016 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the properties of the variance risk premium (VRP). We propose a flexible asset pricing model that captures co-jumps in prices and volatility, and self-exciting jump clustering. We estimate the model on equity returns and variance swap rates at different horizons. The total VRP is negative and has a downward-sloping term structure, while its jump component displays an upward-sloping term structure. The abrupt and persistent response of the short-term jump VRP to extreme events makes this specific premium a proxy for investors' fear of a market crash. Furthermore, the use of the VRP level and slope, and of its components, helps improve the short-run predictability of equity excess returns.
Book Synopsis Variance Swap Premium Under Stochastic Volatility and Self-exciting Jumps by : Ke Chen (Economist)
Download or read book Variance Swap Premium Under Stochastic Volatility and Self-exciting Jumps written by Ke Chen (Economist) and published by . This book was released on 2013 with total page 100 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Sources of Time Varying Risk and Risk Premia in U.S. Stock and Bond Markets by : Bala Arshanapalli
Download or read book Sources of Time Varying Risk and Risk Premia in U.S. Stock and Bond Markets written by Bala Arshanapalli and published by . This book was released on 2003 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the sources of time-varying risk and risk premia for both the U.S. stock and bond markets. Although a growing literature has emerged that examines the return and volatility characteristics of the U.S. stock and bond markets separately, little work has appeared that models these markets jointly. This paper proposes a model that provides evidence concerning the sources of time varying risk and risk premia in the markets that considers both markets simultaneously. The model captures the change in the risk premium to each market's own volatility risk as well as to the covariance risk for specific events. We test for the effects of macroeconomic news on time-varying volatility as well as time-varying covariance, and whether such news induces time-varying risk premia in either of the markets. We find that stocks, as opposed to bonds exhibit a change in the risk premium on variance risk on PPI announcement dates. There is also evidence of a change in the bond risk premium on covariance risk on macroeconomic news announcement dates. Employment reports and PPI releases appear as events inducing time-varying conditional variance for stock, Treasury Notes, as well as Treasury Bond returns. Finally, the results do not support the conjecture that conditional covariance of stock and bond returns falls on announcement days.
Book Synopsis The Price of Variance Risk by : Ian Dew-Becker
Download or read book The Price of Variance Risk written by Ian Dew-Becker and published by . This book was released on 2015 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the period 1996-2014, the average investor in the variance swap market was indifferent to news about future variance at horizons ranging from 1 month to 14 years. It is only purely transitory and unexpected realized variance that were priced. These results present a challenge to most structural models of the variance risk premium, such as the intertemporal CAPM, recent models with Epstein-Zin preferences and long-run risks, and models where institutional investors have value-at-risk constraints. The results also have strong implications for macro models where volatility affects investment decisions, suggesting that investors are not willing to pay to hedge shocks in expected economic uncertainty.
Book Synopsis Essays on FX Variance Risk Premium, Monetary Policy and Currency Returns by : Igor Pozdeev
Download or read book Essays on FX Variance Risk Premium, Monetary Policy and Currency Returns written by Igor Pozdeev and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Variance risk premium is arguably one of the most important and robust risk premia documented in the academic finance. The first chapter of this thesis deals with variance risk on the FX market: therein, I recover risk-neutralized covariance matrices of currency returns and combine them with ex post realized covariance matrices to determine the sign of the premium, associate portfolios ranked from highest to lowest premium values with popular currency factors, study the determinants of the FX variance risk and its explore asset pricing properties. I find evidence for an overall negative FX variance risk premium, but also document existence of strategies with a significantly positive one. Among portfolios with the most negative premium estimates, the US dollar index and Carry trade familiarly emerge. I report that portfolios of negative spot return momentum and high recently realized variance exhibit more negative FX variance risk premium. As far as the asset pricing properties are concerned, the Carry trade variance risk dominates the US dollar variance risk as a priced factor, contributing to resolution of the differential pricing of "good and bad'' carry portfolios. The second chapter studies the dynamics of currency spot and excess returns before policy rate announcements of central banks in developed economies. Therein, Dmitry Borisenko and I show that currencies depreciate before target rate cuts and appreciate before rate hikes. What makes the finding surprising is the fact that the fixed income derivatives market allows to forecast monetary policy decisions accurately enough to make the above drift exploitable by investors: our baseline specification of the trading strategy constructed by going long and short currencies before predicted local rate hikes and cuts earns a significant average return which would be only marginally higher if the forecast quality were perfect. In the third chapter, Nikola Mirkov, Paul Söderl.
Book Synopsis Variance Risk Premiums by : Peter Carr
Download or read book Variance Risk Premiums written by Peter Carr and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a direct and robust method for quantifying the variance risk premium on financial assets. We show that the risk-neutral expected value of return variance, also known as the variance swap rate, is well approximated by the value of a particular portfolio of options. We propose to use the difference between the realized variance and this synthetic variance swap rate to quantify the variance risk premium. Using a large options data set, we synthesize variance swap rates and investigate the historical behavior of variance risk premiums on five stock indexes and 35 individual stocks.
Book Synopsis Quantifying the Variance Risk Premium in VIX Options by : Amir Barnea
Download or read book Quantifying the Variance Risk Premium in VIX Options written by Amir Barnea and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses synthetically created variance swaps on VIX futures to quantify the variance risk premium in VIX options. The results of this methodology suggest that the average premium is -3.26%, meaning that the realized variance on VIX futures is on average less than the variance implied by the swap rate. This premium does not vary with time or the level of the swap rate as much as premiums in other asset classes. A negative risk premium implies that VIX option strategies that are net credit should be profitable.
Book Synopsis Variance Risk in Aggregate Stock Returns and Time-Varying Return Predictability by : Sungjune Pyun
Download or read book Variance Risk in Aggregate Stock Returns and Time-Varying Return Predictability written by Sungjune Pyun and published by . This book was released on 2019 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper introduces a new out-of-sample forecasting methodology for monthly market returns using the variance risk premium (VRP) that is both statistically and economically significant. This methodology is motivated by the `beta representation,' which implies that the market risk premium is related to the price of variance risk by the variance risk exposure. Hence, when the slope of the contemporaneous regression of market returns on variance innovation is larger, future returns are more sharply related to the current VRP. Also, predictions are more accurate when market returns are highly correlated to variance shocks.
Book Synopsis Average Stock Variance and Market Returns by : Huafeng (Jason) Chen
Download or read book Average Stock Variance and Market Returns written by Huafeng (Jason) Chen and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a daily measure of average stock variance and study whether it can predict market returns one day ahead. Using a time-invariant prediction model we find a robust predictive relation between these variables which cannot be used to profitably time the market. A closer look reveals that the strength and even the direction of the predictive relation vary significantly over short periods of time. Moreover, a simple timing strategy that exploits this variation over time significantly outperforms the market buy-and-hold strategy in terms of the mean-variance tradeoff. The evidence shows that predictability is stronger during business-cycle contractions and that our timing strategy is profitable because it avoids losses during bad times. Last, parameter breaks occur very frequently over short periods of time, and not only when the economy switches the phase of the business cycle. Our results suggest that idiosyncratic risk matters in asset pricing and that its effect is time varying.
Book Synopsis Market Excess Returns, Variance and the Third Cumulant by : Eric C. Chang
Download or read book Market Excess Returns, Variance and the Third Cumulant written by Eric C. Chang and published by . This book was released on 2015 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we develop an equilibrium asset pricing model for the market excess return, variance and the third cumulant by using a jump-diffusion process with stochastic variance and jump intensity in Cox, Ingersoll and Ross' (1985) production economy. Empirical evidence with S&P 500 index and options from January 1996 to December 2005 strongly supports our model prediction that lower the third cumulant, higher the market excess returns. Consistent with existing literature, the theoretical mean-variance relation is supported only by regressions on risk-neutral variance. We further demonstrate empirically that the third cumulant explains significantly the variance risk premium.
