The term structure of equity and variance risk premia

Yacine Aït-Sahalia, Mustafa Karaman, Loriano Mancini

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

We study the term structure of variance swaps, equity and variance risk premia. A model-free analysis reveals a significant price jump component in variance swaps. A model-based analysis shows that investors’ willingness to ensure against volatility risk increases after a market drop. This effect is stronger for short maturities, but more persistent for long maturities. During the financial crisis investors demanded large risk premia to hold equities, but the risk premia largely depended on and strongly decreased with the holding horizon. The term structure of equity and variance risk premia responds differently to various economic indicators.

Original languageEnglish (US)
Pages (from-to)204-230
Number of pages27
JournalJournal of Econometrics
Volume219
Issue number2
DOIs
StatePublished - Dec 2020

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Equity risk premium
  • Likelihood approximation
  • Stochastic volatility
  • Term structure
  • Variance risk premium
  • Variance swap

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