Variance Risk Premiums
Author | : Peter Carr |
Publisher | : |
Total Pages | : |
Release | : 2010 |
ISBN-10 | : OCLC:1290791724 |
ISBN-13 | : |
Rating | : 4/5 (24 Downloads) |
Download or read book Variance Risk Premiums written by Peter Carr and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a direct and robust method for quantifying the variance risk premium on financial assets. We show that the risk-neutral expected value of return variance, also known as the variance swap rate, is well approximated by the value of a particular portfolio of options. We propose to use the difference between the realized variance and this synthetic variance swap rate to quantify the variance risk premium. Using a large options data set, we synthesize variance swap rates and investigate the historical behavior of variance risk premiums on five stock indexes and 35 individual stocks.