Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review
Dynamics of variance risk premia : A new model for disentangling the price of risk. / Rombouts, Jeroen V.K.; Stentoft, Lars; Violante, Francesco.
In: Journal of Econometrics, Vol. 217, No. 2, 2020, p. 312-334.Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review
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TY - JOUR
T1 - Dynamics of variance risk premia
T2 - A new model for disentangling the price of risk
AU - Rombouts, Jeroen V.K.
AU - Stentoft, Lars
AU - Violante, Francesco
PY - 2020
Y1 - 2020
N2 - This paper formulates a new dynamic model for the variance risk premium based on a state space representation of a bivariate system for the observable ex-post realized variance and the ex-ante option implied variance expectation. A regime switching structure accommodates for periods of unusually high volatility, heterogeneous dynamics and changes in the dependence between the latent states. The model allows separating the continuous component of the variance risk premium from the impact of jumps on option implied variance expectations. Using options and high frequency returns for the S&P500 index, we explain what is generating return predictability by disentangling the part of the variance risk premium associated with normal sized price fluctuations from that associated with tail events. The latter component predicts to a significant extent, and asymmetrically with respect to their sign, future market return variations.
AB - This paper formulates a new dynamic model for the variance risk premium based on a state space representation of a bivariate system for the observable ex-post realized variance and the ex-ante option implied variance expectation. A regime switching structure accommodates for periods of unusually high volatility, heterogeneous dynamics and changes in the dependence between the latent states. The model allows separating the continuous component of the variance risk premium from the impact of jumps on option implied variance expectations. Using options and high frequency returns for the S&P500 index, we explain what is generating return predictability by disentangling the part of the variance risk premium associated with normal sized price fluctuations from that associated with tail events. The latter component predicts to a significant extent, and asymmetrically with respect to their sign, future market return variations.
KW - Return predictability
KW - Sentiment indicators
KW - Variance risk premium
UR - http://www.scopus.com/inward/record.url?scp=85076853471&partnerID=8YFLogxK
U2 - 10.1016/j.jeconom.2019.12.006
DO - 10.1016/j.jeconom.2019.12.006
M3 - Journal article
AN - SCOPUS:85076853471
VL - 217
SP - 312
EP - 334
JO - Journal of Econometrics
JF - Journal of Econometrics
SN - 0304-4076
IS - 2
ER -