The Variance Risk Premium: Estimating the Risk Premium of Variance from Synthesized Variance Swap Rates

Fabian Hansen Grønland

Studenteropgave: Kandidatafhandlinger

Abstract

In this thesis, a model-free approach for estimating the Variance Risk Premium is implemented by synthesizing Variance Swap Rates from option prices and calculating the Realized Variance for the same period. The analysis is from data spanning from January 1996 to November 2021, giving a large span of Variance Risk Premiums to interpret. In addition, several regression has been estimated showing that the Variance Risk Premium is negative, negatively correlated with market return, time-varying in level terms, and time-constant in Log terms. Possible underlying causes for variance risk were investigated from the CAPM and Fama-French 3, but to no real result. A short analysis of the profitability and risk of selling variance was done, giving results indicating high profitability, but also high losses during black swan events such as the 2008 and 2020 crises.

UddannelserCand.merc.oecon Advanced Economics and Finance, (Kandidatuddannelse) Afsluttende afhandling
SprogEngelsk
Udgivelsesdato2023
Antal sider53
VejledereAnders Bjerre Trolle