How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns

Arbeitspapier

We explore whether the market variance risk premium (VRP) can be predicted. First, we propose a novel approach to measure VRP which distinguishes the investment horizon from the variance swap's maturity. We extract VRP from actual rather than synthetic S&P 500 variance swap quotes, thus avoiding biases in VRP measurement. Next, we find that a deterioration of the economy and of the trading activity, increases VRP. These relations hold both in- and out-of-sample for various maturities and investment horizons and they are economically significant. Volatility trading strategies which condition on the detected relations outperform popular buy-and-hold strategies even after transaction costs are considered.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 732

Classification and Topics

• Classification: Wirtschaft ; Contingent Pricing; Futures Pricing; option pricing ; Financial Forecasting and Simulation
• Subject: Economic conditions ; Predictability ; Trading activity ; Variance swaps ; Variance risk premium ; Volatility trading

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Konstantinidi, Eirini ; Skiadopoulos, George
• Event: Veröffentlichung
• (who): Queen Mary University of London, School of Economics and Finance
• (where): London
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/122064
• Last update: 10.03.2025, 11:42 AM CET