Risk Premium, Variance Premium, and the Maturity Structure of Uncertainty

Feunou, B.; Fontaine, J.S.; Taamouti, A.; Tédongap, R.

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.

Citation

Feunou, B., Fontaine, J., Taamouti, A., & Tédongap, R. (2014). Risk Premium, Variance Premium, and the Maturity Structure of Uncertainty. Review of Finance, 18(1), 219-269. https://doi.org/10.1093/rof/rft004

• Journal Article Type: Article
• Online Publication Date: Mar 16, 2013
• Publication Date: Jan 1, 2014
• Deposit Date: Nov 7, 2014
• Publicly Available Date: Mar 3, 2015
• Journal: Review of Finance
• Print ISSN: 1572-3097
• Electronic ISSN: 1573-692X
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 18
• Issue: 1
• Pages: 219-269
• DOI: https://doi.org/10.1093/rof/rft004
• Public URL: https://durham-repository.worktribe.com/output/1450963