Quantifying the variance risk premium

: an analysis of the dynamics of swapping realized versus risk-neutral implied variance

Abstract

Variance risk premia are computed based on the VIX methodology for four stock
indices and five single stocks over two different time periods. The findings show that
times of market uncertainty as observed in 2008/09 and 2020 affect variance swap
returns significantly and decrease the profitability of short positions in variance
swaps. Adjusting the time series through the exclusion of 2020, variance risk premia become more negative and significant, implying that investors accept paying a
premium for market insurance. This study reveals that the CAPM and the 3-factor
model (Fama and French 1993) cannot sufficiently explain variance risk premia.

Date of Award	28 Apr 2021
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Eva Schliephake (Supervisor)