When Variance Risk Has Two Prices: Evidence from the Equity and Option Markets

Time: 1.00pm - 2.00pm
Venue: R407 (FMG Library), 4th Floor, Lionel Robbins Building.
Speaker: Aytek Malkhozov (McGill University)
Seminar title: When Variance Risk Has Two Prices: Evidence from the Equity and Option Markets
Paper: a copy of this paper can be found here.
Abstract:  We estimate the quarterly dynamics of the Variance Risk Premium (VRP) in both the equity and option markets. We …nd that the two VRPs follow similar patterns and responds similarly to changes in volatility and business cycle conditions. However, they also exhibit large, but temporary di¤erences. We …nd that such di¤erences are largely explained by variables that proxy for changes in the risk-bearing capacity of …nancial intermediaries. These results are consistent with the role played by these intermediaries in setting prices in the option market. They also suggest that frictions may limit risk sharing across the two markets and that the option VRP is at times a biased measure of the risk attitude of equity investors.