Variance Risk Premia on Stocks and Bonds

Philippe Mueller, Petar Sabtchevsky, Andrea Vedolin, Paul Whelan

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

Investors in fixed income markets are willing to pay a very large premium to be hedged against shocks in expected volatility and the size of this premium can be studied through variance swaps. Using thirty years of option and high-frequency data, we document the following novel stylized facts: First, exposure to bond market volatility is strongly priced with a Sharpe ratio of -1.8, 20% higher than what is observed in the equity market. Second, while there is strong co-movement between equity and bond market variance risk, there are distinct periods when the bond variance risk premium is different from the equity variance risk premium. Third, the conditional correlation between stock and bond market variance risk premium switches sign often and ranges between -60% and +90%. We then show that these stylized facts pose a challenge to standard consumption-based asset pricing models.
Original languageEnglish
Publication date2016
Number of pages48
Publication statusPublished - 2016
EventThe 43rd European Finance Association Annual Meeting (EFA 2016) - BI Norwegian Business School, Oslo, Norway
Duration: 17 Aug 201620 Aug 2016
Conference number: 43
http://www.efa2016.org/

Conference

ConferenceThe 43rd European Finance Association Annual Meeting (EFA 2016)
Number43
LocationBI Norwegian Business School
CountryNorway
CityOslo
Period17/08/201620/08/2016
Internet address

Keywords

  • Variance risk premia
  • Implied volatility
  • Realised volatility
  • Covariation
  • Long run risk
  • Stocks
  • Bonds

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