Variance Risk Premia on Stocks and Bonds

Philippe Mueller, Petar Sabtchevsky, Andrea Vedolin, Paul Whelan

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

We study equity (EVRP) and Treasury variance risk premia (TVRP) jointly and document a number of findings: First, relative to their volatility, TVRP are comparable in magnitude to EVRP. Second, while there is mild positive co-movement between EVRP and TVRP unconditionally, time series estimates of correlation display distinct spikes in both directions and have been notably volatile since the financial crisis. Third $(i)$ short maturity TVRP predict excess returns on short maturity bonds; $(ii)$ long maturity TVRP and EVRP predict excess returns on long maturity bonds; and $(iii)$ while EVRP predict equity returns for horizons up to 6-months, long maturity TVRP contain robust information for long run equity returns. Finally, exploiting the dynamics of real and nominal Treasuries we document that short maturity break-even rates are a power determinant of the joint dynamics of EVRP, TVRP and their co-movement. We argue this result is consistent with an economy in which derivative markets embed fears about deflation.
Original languageEnglish
Publication date2017
Number of pages42
Publication statusPublished - 2017
Event2017 Annual Meeting of the Society for Economic Dynamics - Edinburgh, United Kingdom
Duration: 22 Jun 201724 Jun 2017
https://www.economicdynamics.org/sedam_2017/

Conference

Conference2017 Annual Meeting of the Society for Economic Dynamics
CountryUnited Kingdom
CityEdinburgh
Period22/06/201724/06/2017
Internet address

Keywords

  • Variance risk premia
  • Implied volatility
  • Realized volatility
  • Covariation
  • Stocks
  • Bonds

Cite this