Working Paper: NBER ID: w21182
Authors: Ian Dewbecker; Stefano Giglio; Anh Le; Marius Rodriguez
Abstract: In the period 1996-2014, the average investor in the variance swap market was indifferent to news about future variance at horizons ranging from 1 month to 14 years. It is only purely transitory and unexpected realized variance that were priced. These results present a challenge to most structural models of the variance risk premium, such as the intertemporal CAPM, recent models with Epstein-Zin preferences and long-run risks, and models where institutional investors have value-at-risk constraints. The results also have strong implications for macro models where volatility affects investment decisions, suggesting that investors are not willing to pay to hedge shocks in expected economic uncertainty.
Keywords: variance swaps; volatility; risk premium; macroeconomic models
JEL Codes: E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of pricing for volatility news (G13) | investor behavior (G41) |
| shocks to expected volatility (C58) | returns (Y60) |
| exposure to realized variance (C58) | pricing (D49) |
| realized variance shock (C22) | returns (Y60) |