MS3940.pdf (602.04 kB)
Variance-of-variance risk premium
This article explores the premium for bearing the variance risk of the VIX index, called the variance-of-variance risk premium. I find that during the sample period from 2006 until 2014 trading strategies exploiting the difference between the implied and realized variance of the VIX index yield average excess returns of?-?24.16% per month, with an alpha of?-?16.98% after adjusting for Fama–French and Carhart risk factors as well as accounting for variance risk (both highly significant). The article provides further evidence of risk premium characteristics using corridor variance swaps and compares empirical results with the predictions of reduced-form and structural benchmark models.
History
Publication status
- Published
File Version
- Accepted version
Journal
Review of FinanceISSN
1572-3097Publisher
Oxford University PressExternal DOI
Issue
4Volume
22Page range
1549-1579Department affiliated with
- Accounting and Finance Publications
Research groups affiliated with
- Quantitative International Finance Network Publications
Full text available
- Yes
Peer reviewed?
- Yes