The Term Structure of the Price of Variance Risk

Schmalz, Martin C., Andries, Marianne, Wang, Yichuan and Eisenbach, Thomas M. (2015) The Term Structure of the Price of Variance Risk. Federal Reserve Bank of New York.

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Abstract

We estimate the term structure of the price of variance risk (PVR), which helps distinguish between competing asset-pricing theories. First, we measure the PVR as proportional to the Sharpe ratio of short-term holding returns of delta-neutral index straddles; second, we estimate the PVR in a Heston (1993) stochastic-volatility model. In both cases, the estimation is performed separately for different maturities. We find the PVR is negative and decreases in absolute value with maturity; it is more negative and its term structure is steeper when volatility is high. These findings are inconsistent with calibrations of established asset-pricing models that assume
constant risk aversion across maturities.

Item Type: Other Working Paper
Keywords: volatility risk, option returns, straddle, term structure, finance
Subject(s): Finance
Date Deposited: 10 Jan 2019 15:51
Last Modified: 10 Jan 2019 15:51
Funders: n/a
URI: http://eureka.sbs.ox.ac.uk/id/eprint/7234

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