Risk Premia and the VIX Term Structure

2017 ◽  
Vol 52 (6) ◽  
pp. 2461-2490 ◽  
Author(s):  
Travis L. Johnson
Keyword(s):  
Term Structure ◽  
Principal Component ◽  
Risk Premia ◽  
Expectations Hypothesis ◽  
Variance Swaps ◽  
Volatility Index ◽  
Asset Pricing Models ◽  
Vix Futures ◽  
Synthetic Standard ◽  
Variance Risk

The shape of the Chicago Board Options Exchange Volatility Index (VIX) term structure conveys information about the price of variance risk rather than expected changes in the VIX, a rejection of the expectations hypothesis. The second principal component, SLOPE, summarizes nearly all this information, predicting the excess returns of synthetic Standard & Poor’s (S&P) 500 variance swaps, VIX futures, and S&P 500 straddles for all maturities and to the exclusion of the rest of the term structure. SLOPE’s predictability is incremental to other proxies for the conditional variance risk premia, economically significant, and inconsistent with standard asset pricing models.

The term structure of equity and variance risk premia

2020 ◽  
Vol 219 (2) ◽  
pp. 204-230 ◽  
Author(s):  
Yacine Aït-Sahalia ◽  
Mustafa Karaman ◽  
Loriano Mancini
Keyword(s):  
Term Structure ◽  
Risk Premia ◽  
Variance Risk

The Price of the Smile and Variance Risk Premia

2020 ◽  
Author(s):  
Peter H. Gruber ◽  
Claudio Tebaldi ◽  
Fabio Trojani
Keyword(s):  
Term Structure ◽  
Risk Premium ◽  
Implied Volatility ◽  
Risk Premia ◽  
State Variables ◽  
State Spaces ◽  
State Process ◽  
Joint Dynamics ◽  
Variance Risk ◽  
Implied Volatility Surfaces

Using a new specification of multifactor volatility, we estimate the hidden risk factors spanning S&P 500 index (SPX) implied volatility surfaces and the risk premia of volatility-sensitive payoffs. SPX implied volatility surfaces are well-explained by three dependent state variables reflecting (i) short- and long-term implied volatility risks and (ii) short-term implied skewness risk. The more persistent volatility factor and the skewness factor support a downward sloping term structure of variance risk premia in normal times, whereas the most transient volatility factor accounts for an upward sloping term structure in periods of distress. Our volatility specification based on a matrix state process is instrumental to obtaining a tractable and flexible model for the joint dynamics of returns and volatilities, which improves pricing performance and risk premium modeling with respect to recent three-factor specifications based on standard state spaces. This paper was accepted by Gustavo Manso, finance.

scholarly journals Inflation Risk Premia, Yield Volatility, and Macro Factors

2018 ◽  
Vol 17 (3) ◽  
pp. 397-431 ◽  
Author(s):  
Andrea Berardi ◽  
Alberto Plazzi
Keyword(s):  
Term Structure ◽  
Risk Premium ◽  
Implied Volatility ◽  
Risk Premia ◽  
Output Growth ◽  
Inflation Risk ◽  
Variance Risk Premium ◽  
Real Risk ◽  
Variance Risk ◽  
Inflation Risk Premia

Abstract We incorporate a latent stochastic volatility factor and macroeconomic expectations in an affine model for the term structure of nominal and real rates. We estimate the model over 1999–2016 on U.S. data for nominal and TIPS yields, the realized and implied volatility of T-bonds, and survey forecasts of GDP growth and inflation. We find relatively stable inflation risk premia averaging at 40 basis points at the long-end, and which are strongly related to the volatility factor and conditional mean of output growth. We also document real risk premia that turn negative in the post-crisis period, and a non-negligible variance risk premium.

The Variance Swaps based on KOSPI200 Index and the Term Structure of Variance Risk Premium

2013 ◽  
Vol 21 (4) ◽  
pp. 435-463
Author(s):  
Young Ho Eom ◽  
Woon Wook Jang
Keyword(s):  
Risk Factors ◽  
Term Structure ◽  
Risk Premium ◽  
Risk Averse ◽  
Realized Variance ◽  
Over The Counter ◽  
Variance Swaps ◽  
Variance Swap ◽  
Variance Risk Premium ◽  
Variance Risk

This study examines whether the variance risk is a priced risk factor in Korea using the over-the-counter variance swap quotes and realized variance data. We also study the term structure of variance risk premium. The empirical results show that the model with 2 stochastic variance risk factors with jumps in return is required to fit the variance swap and realized variance data. The analyses with the estimated models suggest that the variance risk premium in Korea are highly negative and the size of the premium increase with the maturities, meaning that risk averse investors in Korea are willing to pay a premium to hedge variance risk.

scholarly journals Macroeconomics and the Term Structure

2012 ◽  
Vol 50 (2) ◽  
pp. 331-367 ◽  
Author(s):  
Refet S Gürkaynak ◽  
Jonathan H Wright
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Risk Premia ◽  
Unified Framework ◽  
Expectations Hypothesis ◽  
Segmented Markets ◽  
Recent Developments ◽  
Recent Financial Crisis ◽  
Finance Theory

This paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance. The topic is important to investors and also to policymakers, who wish to extract macroeconomic expectations from longer-term interest rates, and take actions to influence those rates. The simplest model of the term structure is the expectations hypothesis, which posits that long-term interest rates are expectations of future average short-term rates. In this paper, we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis. We review models that explain these anomalies using time-varying risk premia. Although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing, inflation uncertainty seems to play a large role. Finally, while modern finance theory prices bonds and other assets in a single unified framework, we also consider an earlier approach based on segmented markets. Market segmentation seems important to understand the term structure of interest rates during the recent financial crisis. (JEL E31, E43, E52, E58)

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