Risk premium, variance premium, and the maturity structure of uncertainty Articles uri icon

authors

  • FEUNOU, BRUNO
  • FONTAINE, JEAN-SEBASTIÉN
  • TAAMOUTI, ABDERRAHIM
  • TÉDONGAP, ROMÉO

publication date

  • January 2014

start page

  • 219

end page

  • 269

issue

  • 1

volume

  • 18

International Standard Serial Number (ISSN)

  • 1572-3097

Electronic International Standard Serial Number (EISSN)

  • 1573-692X

abstract

  • Structural or no-arbitrage asset-pricing models emphasize risk factors that cannot be observed directly. We show that the term structure of risk implicit in option prices can reveal these risk factors. Empirically, the variance term structure reveals two predictors of the bond premium, the equity premium, and the variance premium, jointly. Similarly, the term structures of skewness and kurtosis measures also reveal risk factors, but these are subsumed in the predictive content of the variance. The predicted premium is countercyclical and robust to the inclusion of known returns predictors.

keywords

  • reduced-rank regression; expected stock returns; conditional heteroskedasticity; option valuation; term structure; long-run; volatility; model; information; preference