The price of variance risk

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

Research output: Contribution to journalArticlepeer-review

30 Scopus citations

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

All Science Journal Classification (ASJC) codes

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

Fingerprint Dive into the research topics of 'The price of variance risk'. Together they form a unique fingerprint.

Cite this