The Price of Variance Risk, Journal of Financial Economics

Abstract

The average investor in the variance swap market is 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 is 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. 

Type

Article

Author(s)

Ian Dew-Becker, Marius Rodriguez

Date Published

2016

Citations

Dew-Becker, Ian, and Marius Rodriguez. 2016. The Price of Variance Risk. Journal of Financial Economics.

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