The price of variance risk

Ian Dew-Becker, Stefano Giglio, Anh Le, Marius Rodriguez

Research output: Contribution to journalArticle

20 Citations (Scopus)

Abstract

Between 1996 and 2014, it was costless on average to hedge news about future variance at horizons ranging from 1 quarter to 14 years. Only unexpected, transitory realized variance was significantly priced. These results present a challenge to many structural models of the variance risk premium, such as the intertemporal CAPM and recent models with Epstein–Zin preferences and long-run risks. The results are also difficult to reconcile with macro models in which volatility affects investment decisions. At the same time, the data allows us to distinguish between different disaster models; a model in which the stock market has a time-varying exposure to disasters and investors have power utility fits the major features of the variance term structure.

Original languageEnglish (US)
Pages (from-to)225-250
Number of pages26
JournalJournal of Financial Economics
Volume123
Issue number2
DOIs
StatePublished - Feb 1 2017

Fingerprint

Disaster
Realized variance
Power utility
Structural model
Time-varying
News
Investment decision
Stock market
Term structure
Capital asset pricing model
Investors
Hedge
Risk premium
Macro model

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

Dew-Becker, I., Giglio, S., Le, A., & Rodriguez, M. (2017). The price of variance risk. Journal of Financial Economics, 123(2), 225-250. https://doi.org/10.1016/j.jfineco.2016.04.003
Dew-Becker, Ian ; Giglio, Stefano ; Le, Anh ; Rodriguez, Marius. / The price of variance risk. In: Journal of Financial Economics. 2017 ; Vol. 123, No. 2. pp. 225-250.
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Dew-Becker, I, Giglio, S, Le, A & Rodriguez, M 2017, 'The price of variance risk', Journal of Financial Economics, vol. 123, no. 2, pp. 225-250. https://doi.org/10.1016/j.jfineco.2016.04.003

The price of variance risk. / Dew-Becker, Ian; Giglio, Stefano; Le, Anh; Rodriguez, Marius.

In: Journal of Financial Economics, Vol. 123, No. 2, 01.02.2017, p. 225-250.

Research output: Contribution to journalArticle

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