Variance Risk Premiums in Foreign Exchange Markets

Item Type Journal paper
Abstract

Based on the theory of static replication of variance swaps we assess the sign and magnitude of variance risk premiums in foreign exchange markets. We find significantly negative risk premiums when realized variance is computed from intraday data with low frequency. As a likely consequence of microstructure effects however, the evidence is ambiguous when realized variance is based on high-frequency data. Common to all estimates, variance risk premiums are highly time-varying and inversely related to the risk-neutral expectation of future variance.
When we test whether variance risk premiums can be attributed to classic risk factors or fear of jump risk, we find that conditional premiums remain significantly negative. However, we observe a strong relationship between the size of log variance risk premiums and the VIX, the TED spread and the general shape of the implied volatility function of the corresponding currency pair. Overall, we conclude that there is a separately priced variance risk factor which commands a highly time-varying premium.

Authors Ammann, Manuel & Buesser, Ralf
Journal or Publication Title Journal of Empirical Finance
Language English
Keywords Foreign exchange, variance risk premium, variance swap, intraday data, risk-neutral expectation, jump risk
Subjects business studies
Institute/School SoF - School of Finance
s/bf - Swiss Institute of Banking and Finance
HSG Classification contribution to scientific community
Refereed Yes
Date September 2013
Publisher Elsevier
Place of Publication Amsterdam
Volume 2013
Number 23
Page Range 16-32
Number of Pages 17
ISSN 0927-5398
ISSN-Digital 1879-1727
Publisher DOI 10.1016/j.jempfin.2013.04.006
Depositing User Prof. Dr. Manuel Ammann
Date Deposited 03 May 2013 12:41
Last Modified 23 Aug 2016 11:16
URI: https://www.alexandria.unisg.ch/publications/222654

Download

[img]
Preview
Text
13_4_Ammann_ Variance Risk Premiums.pdf

Download (700kB) | Preview

Citation

Ammann, Manuel & Buesser, Ralf (2013) Variance Risk Premiums in Foreign Exchange Markets. Journal of Empirical Finance, 2013 (23). 16-32. ISSN 0927-5398

Statistics

https://www.alexandria.unisg.ch/id/eprint/222654
Edit item Edit item
Feedback?