Title: Variance risk: A bird's eye view
Authors: Chardin Wese - ICMA Centre, University of Reading (United Kingdom) [presenting]
Fabian Hollstein - Leibniz University Hannover (Germany)
Abstract: Prior research using daily returns data documents a significantly negative variance risk premium (VRP) for the S\&P 500 index but generally not for constituent stocks. Using high-frequency data to compute the realized variance estimates, we show that the average VRP of individual equities is economically large and significant. We decompose the index VRP into factors related to the VRP of equities and the correlation risk premium. The former drives the variations in the index VRP while the latter captures the level of the index VRP. These factors predict excess stock returns in the time-series and cross-section, but at different horizons.