Variance-of-variance risk premium

Kaeck, Andreas (2018) Variance-of-variance risk premium. Review of Finance, 22 (4). pp. 1549-1579. ISSN 1572-3097

[img] PDF (This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.) - Accepted Version
Download (616kB)

Abstract

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.

Item Type: Article
Schools and Departments: University of Sussex Business School > Accounting and Finance
Research Centres and Groups: Quantitative International Finance Network
Depositing User: Andreas Kaeck
Date Deposited: 27 Jan 2017 13:21
Last Modified: 04 Nov 2019 10:01
URI: http://sro.sussex.ac.uk/id/eprint/66438

View download statistics for this item

📧 Request an update