Variance Risk Premiums on the OMXS30 and S&P 500

Detta är en D-uppsats från Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Författare: Magnus Petersson; Joso Saric; [2008]

Nyckelord: variance; risk premium; variance swap; option; OTC;

Sammanfattning: In this thesis we analyze and quantify the variance risk premium, defined as the average difference between realized variance and its risk-neutral expectation. The risk-neutral expectation is obtained by using the notion of a variance swap, a contract that pays the difference between realized variance and a predetermined variance swap rate. Synthetically constructing variance swap rates from observed option prices on the S&P 500 and OMXS30 equity indexes we are able to calculate their variance risk premiums. The calculated variance swap rates and thereby our results are found to be robust to computational assumptions and correspond well to actual over-the-counter (OTC) variance swap quotes obtained from two investment banks. The average variance risk premiums are found to be strongly negative and statistically significant for the S&P 500 and on the short-term horizon for the OMXS30 index. In addition, we show that investors have historically been able to earn superior risk-adjusted returns by short-selling variance risk. Since the variance risk premium on the OMXS30 has previously not been studied, the results on this smaller Swedish equity index can be readily compared to the variance risk premiums on other indexes.

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