IDEAS home Printed from https://ideas.repec.org/p/mag/wpaper/140009.html
   My bibliography  Save this paper

Up- and Downside Variance Risk Premia in Global Equity Markets

Author

Listed:
  • Matthias Held

    (Faculty of Finance, WHU - Otto Beisheim School of Management)

  • Marcel Omachel

    (Faculty of Finance, WHU - Otto Beisheim School of Management)

Abstract

This paper studies the variance risk premium from a new perspective by disaggregating the total premium into upper and lower semivariance premia. To this end, we provide novel tools for computing conditional expectations using traded options as well as moment generating functions. Across a dataset of global stock market indices, we find that the variance premium is almost exclusively driven by downside risk. Our results are robust with respect to the sample period. These findings substantiate the hypothesis found in the literature that the variance premium is largely driven by the left tail of the index return distribution.

Suggested Citation

  • Matthias Held & Marcel Omachel, 2014. "Up- and Downside Variance Risk Premia in Global Equity Markets," FEMM Working Papers 140009, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    • Handle: RePEc:mag:wpaper:140009
    as

    Download full text from publisher

    File URL: http://www.fww.ovgu.de/fww_media/femm/femm_2014/2014_09.pdf
    File Function: First version, 2011
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lars Peter Hansen & Thomas J Sargent, 2014. "Robust Control and Model Uncertainty," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 5, pages 145-154, World Scientific Publishing Co. Pte. Ltd..
    2. Darrell Duffie & Jun Pan & Kenneth Singleton, 2000. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," Econometrica, Econometric Society, vol. 68(6), pages 1343-1376, November.
    3. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    4. Gurdip Bakshi & Nikunj Kapadia, 2003. "Delta-Hedged Gains and the Negative Market Volatility Risk Premium," The Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 527-566.
    5. Itamar Drechsler & Amir Yaron, 2011. "What's Vol Got to Do with It," The Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 1-45.
    6. Bjørn Eraker & Ivan Shaliastovich, 2008. "An Equilibrium Guide To Designing Affine Pricing Models," Mathematical Finance, Wiley Blackwell, vol. 18(4), pages 519-543, October.
    7. Estrada, Javier, 2007. "Mean-semivariance behavior: Downside risk and capital asset pricing," International Review of Economics & Finance, Elsevier, vol. 16(2), pages 169-185.
    8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    9. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    10. Gurdip Bakshi & Nikunj Kapadia & Dilip Madan, 2003. "Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options," The Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 101-143.
    11. Harlow, W. V. & Rao, Ramesh K. S., 1989. "Asset Pricing in a Generalized Mean-Lower Partial Moment Framework: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(3), pages 285-311, September.
    12. Peter Carr & Liuren Wu, 2009. "Variance Risk Premiums," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1311-1341, March.
    13. P. Carr & D. Madan, 2001. "Optimal positioning in derivative securities," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 19-37.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sarac, Burak, 2021. "Varianzrisikoprämien auf deutsche Staatsanleihen [Variance Risk Premiums on German Government Bonds]," Junior Management Science (JUMS), Junior Management Science e. V., vol. 6(2), pages 370-392.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bryan Kelly & Hao Jiang, 2013. "Tail Risk and Asset Prices," NBER Working Papers 19375, National Bureau of Economic Research, Inc.
    2. Held, Matthias & Kapraun, Julia & Omachel, Marcel & Thimme, Julian, 2020. "Up- and downside variance risk premia in global equity markets," Journal of Banking & Finance, Elsevier, vol. 118(C).
    3. Huang, Darien & Kilic, Mete, 2019. "Gold, platinum, and expected stock returns," Journal of Financial Economics, Elsevier, vol. 132(3), pages 50-75.
    4. Elyasiani, Elyas & Gambarelli, Luca & Muzzioli, Silvia, 2020. "Moment risk premia and the cross-section of stock returns in the European stock market," Journal of Banking & Finance, Elsevier, vol. 111(C).
    5. Bams, Dennis & Blanchard, Gildas & Honarvar, Iman & Lehnert, Thorsten, 2017. "Does oil and gold price uncertainty matter for the stock market?," Journal of Empirical Finance, Elsevier, vol. 44(C), pages 270-285.
    6. Tai‐Yong Roh & Alireza Tourani‐Rad & Yahua Xu & Yang Zhao, 2021. "Volatility‐of‐volatility risk in the crude oil market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(2), pages 245-265, February.
    7. Schlag, Christian & Semenischev, Michael & Thimme, Julian, 2020. "Predictability and the cross-section of expected returns: A challenge for asset pricing models," SAFE Working Paper Series 289, Leibniz Institute for Financial Research SAFE.
    8. Cao, Jie & Han, Bing, 2013. "Cross section of option returns and idiosyncratic stock volatility," Journal of Financial Economics, Elsevier, vol. 108(1), pages 231-249.
    9. Bollerslev, Tim & Todorov, Viktor & Xu, Lai, 2015. "Tail risk premia and return predictability," Journal of Financial Economics, Elsevier, vol. 118(1), pages 113-134.
    10. Ruan, Xinfeng & Zhang, Jin E., 2018. "Equilibrium variance risk premium in a cost-free production economy," Journal of Economic Dynamics and Control, Elsevier, vol. 96(C), pages 42-60.
    11. Neuhierl, Andreas & Varneskov, Rasmus T., 2021. "Frequency dependent risk," Journal of Financial Economics, Elsevier, vol. 140(2), pages 644-675.
    12. Albert S. (Pete) & Karamfil Todorov, 2023. "The cumulant risk premium," BIS Working Papers 1128, Bank for International Settlements.
    13. Felix Brinkmann & Olaf Korn, 2018. "Risk-adjusted option-implied moments," Review of Derivatives Research, Springer, vol. 21(2), pages 149-173, July.
    14. Huang, Darien & Schlag, Christian & Shaliastovich, Ivan & Thimme, Julian, 2018. "Volatility-of-volatility risk," SAFE Working Paper Series 210, Leibniz Institute for Financial Research SAFE.
    15. Roh, Tai-Yong & Byun, Suk Joon & Xu, Yahua, 2020. "Downside uncertainty shocks in the oil and gold markets," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 291-307.
    16. Huang, Huichou & MacDonald, Ronald & Zhao, Yang, 2012. "Global Currency Misalignments, Crash Sensitivity, and Downside Insurance Costs," MPRA Paper 53745, University Library of Munich, Germany, revised 18 Nov 2013.
    17. Manuel Ammann & Mathis Mörke, 2019. "Credit Variance Risk Premiums," Working Papers on Finance 1908, University of St. Gallen, School of Finance.
    18. Bollerslev, Tim & Todorov, Viktor, 2023. "The jump leverage risk premium," Journal of Financial Economics, Elsevier, vol. 150(3).
    19. Zhanglong Wang & Kent Wang & Zheyao Pan, 2015. "Conditional equity risk premia and realized variance jump risk," Australian Journal of Management, Australian School of Business, vol. 40(2), pages 295-317, May.
    20. Park, Yang-Ho, 2015. "Volatility-of-volatility and tail risk hedging returns," Journal of Financial Markets, Elsevier, vol. 26(C), pages 38-63.

    More about this item

    Keywords

    variance risk premium; semivariance; derivatives;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mag:wpaper:140009. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Guido Henkel (email available below). General contact details of provider: https://edirc.repec.org/data/fwmagde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.