The Variance Risk Premium

Components, Term Structures, and Stock Return Predictability

Bibliographic Data

ID19418676
AuthorsJunye Li (0000-0002-4881-8616, ESSEC Business School, Singapore ()), Gabriele Zinna (Bank of Italy, Rome, Italy ())
Year2018
Volume36
Issue3
Pages411-425
Publication date2018-07-03
Peer ReviewedYes
Open AccessNo
TypeARTICLE
VenueJournal of Business and Economic Statistics (JOURNAL)
Journal identifiersISSN: 0735-0015 • E-ISSN: 1537-2707
PublisherInforma UK Limited (PUBLISHER • GB)
DOI10.1080/07350015.2016.1191502
OpenAlexW3123085316
LanguageEN
Citations received3
References cited43

This article examines the properties of the variance risk premium (VRP). We propose a flexible asset pricing model that captures co-jumps in prices and volatility, and self-exciting jump clustering. We estimate the model on equity returns and variance swap rates at different horizons. The total VRP is negative and has a downward-sloping term structure, while its jump component displays an upward-sloping term structure. The abrupt and persistent response of the short-term jump VRP to extreme events makes this specific premium a proxy for investors’ fear of a market crash. Furthermore, the use of the VRP level and slope, and of its components, helps improve the short-run predictability of equity excess returns

Capital asset pricing model · Econometrics · Economics · Equity premium puzzle · Financial economics · Geography · Implied volatility · Jump · Predictability · Risk premium · Statistics · Variance risk premium · Variance swap · Volatility risk premium · Financial Markets and Investment Strategies · Financial Risk and Volatility Modeling · Mathematics · Stochastic processes and financial applications

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