The term structure of the price of variance risk

Andries, Marianne; Eisenbach, Thomas M.; Kahn, R. Jay; Schmalz, Martin C.

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The term structure of the price of variance risk

Abstract: We empirically investigate the term structure of variance risk pricing and how it varies over time. Estimating the price of variance risk in a stochastic-volatility option pricing model separately for options of different maturities, we find a price of variance risk that decreases in absolute value with maturity but remains significantly different from zero up to the nine-month horizon. We show that the term structure is consistently downward sloping both during normal times and in times of stress, when required compensation for variance risk increases and its term structure steepens further.

Keywords: volatility risk; option returns; term structure;

JEL Classification: G12; G13;