Staff Reports
Equity Volatility Term Premia
Previous title: “Relative Pricing and Risk Premia in Equity Volatility Markets”
Number 867
September 2018 Revised December 2020

JEL classification: C58, G12, G13

Authors: Peter Van Tassel

This paper estimates the term-structure of volatility risk premia for the stock market. Realized variance term premia are increasing in systematic risk and predict variance swap returns. Implied volatility term premia are decreasing in risk initially, but then increase at a lag, predicting VIX futures returns. By modeling the logarithm of realized variance, the paper derives a closed-form relationship between the prices of variance swaps and VIX futures. The model provides accurate pricing and highlights periods of dislocation between the index options and VIX futures markets. Term premia account for a significant fraction of the variation in long-maturity claims.

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AUTHOR DISCLOSURE STATEMENT(S)
Peter Van Tassel
The author declares he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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