Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/120792
Authors: 
Andries, Marianne
Eisenbach, Thomas
Schmalz, Martin
Wang, Yichuan
Year of Publication: 
2015
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 736
Abstract: 
We estimate the term structure of the price of variance risk (PVR), which helps distinguish between competing asset-pricing theories. First, we measure the PVR as proportional to the Sharpe ratio of short-term holding returns of delta-neutral index straddles; second, we estimate the PVR in a Heston (1993) stochastic-volatility model. In both cases, the estimation is performed separately for different maturities. We find the PVR is negative and decreases in absolute value with maturity; it is more negative and its term structure is steeper when volatility is high. These findings are inconsistent with calibrations of established asset-pricing models that assume constant risk aversion across maturities.
Subjects: 
volatility risk
option returns
straddle
term structure
JEL: 
G12
G13
Document Type: 
Working Paper

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