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The price of variance risk

Author: Ian Dew-Becker; Stefano W Giglio; Anh Le; Marius Rodriguez; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2015.
Series: Working paper series (National Bureau of Economic Research), no. 21182.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
In the period 1996-2014, the average investor in the variance swap market was indifferent to news about future variance at horizons ranging from 1 month to 14 years. It is only purely transitory and unexpected realized variance that were priced. These results present a challenge to most structural models of the variance risk premium, such as the intertemporal CAPM, recent models with Epstein-Zin preferences and  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Ian Dew-Becker; Stefano W Giglio; Anh Le; Marius Rodriguez; National Bureau of Economic Research,
OCLC Number: 909576263
Notes: "May 2015"
Description: 1 online resource (54, A.19 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 21182.
Responsibility: Ian Dew-Becker, Stefano Giglio, Anh Le, Marius Rodriguez.

Abstract:

In the period 1996-2014, the average investor in the variance swap market was indifferent to news about future variance at horizons ranging from 1 month to 14 years. It is only purely transitory and unexpected realized variance that were priced. These results present a challenge to most structural models of the variance risk premium, such as the intertemporal CAPM, recent models with Epstein-Zin preferences and long-run risks, and models where institutional investors have value-at-risk constraints. The results also have strong implications for macro models where volatility affects investment decisions, suggesting that investors are not willing to pay to hedge shocks in expected economic uncertainty.

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