Variance Swaps and Intertemporal Asset Pricing
This paper proposes an ICAPM in which the risk premium embedded in variance swaps is the factor mimicking portfolio for hedging exposure to changes in future investment conditions. Recent empirical evidence shows that the fears by investors to deviations from Normality in the distribution of returns...
| Autores: | , , |
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| Tipo de documento: | relatório científico |
| Data de publicação: | 2011 |
| País: | España |
| Recursos: | Universidad Complutense de Madrid (UCM) |
| Repositório: | Docta Complutense |
| Idioma: | inglês |
| OAI Identifier: | oai:docta.ucm.es:20.500.14352/48983 |
| Acesso em linha: | https://hdl.handle.net/20.500.14352/48983 |
| Access Level: | Acceso aberto |
| Palavra-chave: | Variance risk premium Intertemporal asset pricing Econometría (Economía) Mercados bursátiles y financieros 5302 Econometría |
| Resumo: | This paper proposes an ICAPM in which the risk premium embedded in variance swaps is the factor mimicking portfolio for hedging exposure to changes in future investment conditions. Recent empirical evidence shows that the fears by investors to deviations from Normality in the distribution of returns are able to explain time-varying financial and macroeconomic risks in addition to being a determinant of the variance risk premium. Moreover, variance swaps hedges unfavorable changes in the stochastic investment opportunity set, and is not a redundant asset because significantly expands the efficient mean-variance frontier. Thence, we should expect the variance swap risk premium to be priced in the market. We report relatively favorable evidence on the incremental pricing information associated with the variance risk premium, particularly at shorter horizons. |
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