Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/120788
Authors: 
Vogt, Erik
Year of Publication: 
2014
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 706
Abstract: 
The illiquidity of long-maturity options has made it difficult to study the term structures of option spanning portfolios. This paper proposes a new estimation and inference framework for these option-implied term structures that addresses long-maturity illiquidity. By building a sieve estimator around the risk-neutral valuation equation, the framework theoretically justifies (fat-tailed) extrapolations beyond truncated strikes and between observed maturities while remaining nonparametric. New confidence intervals quantify the term structure estimation error. The framework is applied to estimating the term structure of the variance risk premium and finds that a short-run component dominates market excess return predictability.
Subjects: 
equity risk premium
finance
options
predictability
sieve M estimation
state-price density
term structures
variance risk premium
VIX
JEL: 
C12
C14
C58
G12
G13
G17
Document Type: 
Working Paper

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