Nieto, Belén and Novales Cinca, Alfonso and Rubio, Gonzalo (2011) Variance Swaps and Intertemporal Asset Pricing. [Working Paper or Technical Report] (Unpublished)
Available under License Creative Commons Attribution Non-commercial.
Official URL: http://eprints.ucm.es/12522/
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
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|Deposited On:||04 Apr 2011 09:13|
|Last Modified:||15 Nov 2013 10:49|
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