The Price of Variance Risk

Ian L Dew-Becker, Stefano W. Giglio, Anh Le, Marius Rodriguez

Research output: Working paper

Abstract

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.
Original languageEnglish (US)
PublisherSocial Science Research Network (SSRN)
Number of pages74
StatePublished - Apr 29 2015

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    Dew-Becker, I. L., Giglio, S. W., Le, A., & Rodriguez, M. (2015). The Price of Variance Risk. Social Science Research Network (SSRN). http://ssrn.com/abstract=2471079