The Price of Variance Risk

Ian Dew-Becker, Stefano Giglio, Anh Le and Marius Rodriguez ()

No 21182, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the period 1996-2014, the average investor in the variance swap market was indifferent to news about future variance at horizons ranging from 1 month to 14 years. It is only purely transitory and unexpected realized variance that were priced. These results present a challenge to most structural models of the variance risk premium, such as the intertemporal CAPM, recent models with Epstein-Zin preferences and long-run risks, and models where institutional investors have value-at-risk constraints. The results also have strong implications for macro models where volatility affects investment decisions, suggesting that investors are not willing to pay to hedge shocks in expected economic uncertainty.

JEL-codes: E44 G12 (search for similar items in EconPapers)
Date: 2015-05
New Economics Papers: this item is included in nep-mac and nep-rmg
Note: AP EFG ME
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Citations: View citations in EconPapers (52)

Published as Dew-Becker, Ian & Giglio, Stefano & Le, Anh & Rodriguez, Marius, 2017. "The price of variance risk," Journal of Financial Economics, Elsevier, vol. 123(2), pages 225-250.

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Journal Article: The price of variance risk (2017)
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