Variance swaps and intertemporal asset pricing
- Nieto Domenech, Belén
- Novales Cinca, Alfonso
- Rubio Irigoyen, Gonzalo
ISSN: 2173-1268
Année de publication: 2011
Volumen: 9
Número: 1
Pages: 20-30
Type: Article
D'autres publications dans: The Spanish Review of Financial Economics
Résumé
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.
Références bibliographiques
- Amengual, D., 2009, The term structure of variance risk premia. Working Paper, CEMFI.
- Antón, M., 2010. The price of correlation risk. Theory and evidence. Working Paper, London School of Economics.
- Bollerslev, T., Todorov, V., 2010. Tails, fears, and risk premia. Working Paper, Duke University.
- Bondareko, O., 2004. Market price of variance risk and performance of hedge funds. Working Paper, University of Illinois.
- Brennan, M., Liu, X., Xia, Y., 2006. Option Pricing Kernels and the ICAPM. Working Paper, The Anderson School, UCLA.
- Brennan M., Wang A., Xia Y. Estimation and test of a simple model of intertemporal capital asset pricing. Journal of Finance 2004, 59:1743-1775.
- Carr P., Wu L. Variance risk premia. Review of Financial Studies 2009, 22:1311-1341.
- Chabi-Yo F. Conditioning Information and variance bounds on pricing kernels with higher-order moments: theory and evidence. Review of Financial Studies 2008, 21:181-231.
- Chabi-Yo, F., 2009. Pricing kernels with coskewness and volatility risk. Working Paper, Fisher College of Business, Ohio State University.
- Cochrane J. Asset Pricing 2005, Princeton University Press.
- Driessen J., Maenhout P., Vilkov G. The price of correlation risk: evidence from equity options. Journal of Finance 2009, 64:1377-1406.
- Egloff D., Leippold M., Wu L. The term structure of variance swap rates and optimal variance swap investments. Journal of Financial and Quantitative Analysis 2010, 45. 1279.1310.
- Fama E., MacBeth J. Risk, return, and equilibrium: empirical tests. Journal of Political Economy 1973, 71:607-636.
- Hahn J, Lee H. Yield spreads as alternative risk factors for size and book-to-market. Journal of Financial and Quantitative Analysis 2006, 41:245-269.
- Hansen L., Jagannathan R. Assessing specification errors in stochastic discount factors models. Journal of Finance 1997, 52:557-590.
- Hansen L. Large sample properties of Generalized Method of Moments Estimators. Econometrica 1982, 50:1029-1054.
- Jagannathan R., Wang Z. The conditional CAPM and the cross-section of expected returns. Journal of Finance 1996, 51:3-53.
- Malkhozov, A., 2009. Stochastic volatility and long-run risk in endowment and production economies. Working Paper, McGill University.
- Merton R. An intertemporal capital asset pricing model. Econometrica 1973, 41:867-887.
- Nieto, B., Novales, A., Rubio, G., 2010. Why do variance swaps exist? Working Paper, University CEU Cardenal Herrera.
- Petkova R. Do the Fama-French factors proxy for innovations in predictive variables?. Journal of Finance 2006, 61:581-612.
- Shanken J. On the estimation of beta pricing models. Review of Financial Studies 1992, 5:1-34.
- Todorov V. Variance risk premia dynamics: the role of jump. Review of Financial Studies 2010, 23:345-383.
- Vilkov, G., 2008. Variance risk premium demystified. Working Paper, INSEAD.