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Variance Swaps and Intertemporal Asset Pricing

Nieto, Belén and Novales Cinca, Alfonso and Rubio, Gonzalo (2011) Variance Swaps and Intertemporal Asset Pricing. [ Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 08, 2011, ] (Unpublished)

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Abstract

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.


Item Type:Working Paper or Technical Report
Additional Information:

JEL classification: C13, C14, G10, G12.
The authors
thank seminar participants at the 33th Meeting of the European Accounting Association, the 8th INFINITI
Conference on International Finance, and XVII Foro de Finanzas, IESE, and especially Enrique Sentana,
for constructive comments.

Uncontrolled Keywords:Variance risk premium, Intertemporal asset pricing
Subjects:Social sciences > Economics > Econometrics
Social sciences > Economics > Stock exchanges
Series Name:Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2011
Number:08
ID Code:12522
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Deposited On:04 Apr 2011 09:13
Last Modified:12 Mar 2014 10:55

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