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Variance risk premiums and aging firms

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  • Neururer, Thaddeus

Abstract

In this paper, I investigate how variance risk premiums change as firms age. Negative variance risk premiums represent profits that, on average, accrue to traders willing to sell option protection to other investors. Although typical risk measures decrease as firms age, my results suggest that as firms become older their variance risk premiums decrease. This effect is not explained by option-implied risk measures, fundamental factors, and an option mispricing proxy. This result is also robust across several sample splits based on option market liquidity and the result is not explained by initial public offerings.

Suggested Citation

  • Neururer, Thaddeus, 2023. "Variance risk premiums and aging firms," Finance Research Letters, Elsevier, vol. 58(PA).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323006840
    DOI: 10.1016/j.frl.2023.104312
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    References listed on IDEAS

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    4. Kevin C. Smith & Eric C. So, 2022. "Measuring Risk Information," Journal of Accounting Research, Wiley Blackwell, vol. 60(2), pages 375-426, May.
    5. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
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    More about this item

    Keywords

    Options; Firm age; Implied volatilities; Variance risk premiums; Risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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