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 language||English (US)|
|Number of pages||31|
|Journal||Review of Financial Studies|
|State||Published - Mar 2009|
ASJC Scopus subject areas
- Economics and Econometrics