Title: Variance Discount Rates: What Drives Preferences over Variance Risk?
Abstract: I study time-variation in variance discount rates, defined as the expected returns for investing directly into stock market variance. Using a present value identity for S&P 500 variance swap prices, I document a strong term structure in the decomposition of variance swap price variation. Short-term variance swap prices mostly vary due to variation in expected stock market variance, whereas long-term variance swap prices are predominantly driven by variance discount rates. In contrast, prominent asset pricing models, which feature variance risk to capture time-variation in the equity premium, predict a flat term structure in the decomposition of variance swap price variation.
Publication Year: 2020
Publication Date: 2020-01-01
Language: en
Type: article
Indexed In: ['crossref']
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