Variance risk premiums

Peter Carr, Liuren Wu

Research output: Contribution to journalArticlepeer-review

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1311-1341
Number of pages31
JournalReview of Financial Studies
Volume22
Issue number3
DOIs
StatePublished - Mar 2009

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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