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Equity Volatility Term Premia

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Abstract

This paper estimates the term-structure of volatility risk premia for the stock market. Realized variance term premia are increasing in systematic risk and predict variance swap returns. Implied volatility term premia are decreasing in risk initially, but then increase at a lag, predicting VIX futures returns. By modeling the logarithm of realized variance, the paper derives a closed-form relationship between the prices of variance swaps and VIX futures. The model provides accurate pricing and highlights periods of dislocation between the index options and VIX futures markets. Term premia account for a significant fraction of the variation in long-maturity claims.

Suggested Citation

  • Peter Van Tassel, 2018. "Equity Volatility Term Premia," Staff Reports 867, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:867
    Note: Revised December 2020. Previous title: “Relative Pricing and Risk Premia in Equity Volatility Markets”
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    Cited by:

    1. Peter Van Tassel, 2020. "The Law of One Price in Equity Volatility Markets," Staff Reports 953, Federal Reserve Bank of New York.

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    More about this item

    Keywords

    options; variance risk premium; variance swaps; term structures; return predictability; VIX futures;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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