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Variance-of-variance risk premium

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journal contribution
posted on 2023-06-09, 04:55 authored by Andreas KaeckAndreas Kaeck
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 Finance

ISSN

1572-3097

Publisher

Oxford University Press

Issue

4

Volume

22

Page range

1549-1579

Department affiliated with

  • Accounting and Finance Publications

Research groups affiliated with

  • Quantitative International Finance Network Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2017-01-27

First Open Access (FOA) Date

2019-03-12

First Compliant Deposit (FCD) Date

2017-01-27

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