Variance dynamics: Joint evidence from options and high-frequency returns |
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Authors: | Liuren Wu |
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Institution: | Zicklin School of Business, Baruch College, the City University of New York, United States |
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Abstract: | This paper analyzes the S&P 500 index return variance dynamics and the variance risk premium by combining information in variance swap rates constructed from options and quadratic variation estimators constructed from tick data on S&P 500 index futures. Estimation shows that the index return variance jumps. The jump arrival rate is not constant over time, but is proportional to the variance rate level. The variance jumps are not rare events but arrive frequently. Estimation also identifies a strongly negative variance risk premium, the absolute magnitude of which is proportional to the variance rate level. |
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Keywords: | C13 C51 G12 G13 |
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