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

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

doi:10.1093/rof/rft004

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

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

Authors

B. Feunou

J.S. Fontaine

Professor Abderrahim Taamouti abderrahim.taamouti@durham.ac.uk
Visiting Fellow

R. Tédongap

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

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Copyright Statement
This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The definitive publisher-authenticated version Feunou, B., Fontaine, J.S., Taamouti, A. and Tédongap, R. (2014) 'Risk premium, variance premium, and the maturity structure of uncertainty.', Review of finance., 18 (1): 219-269 is available online at: http://dx.doi.org/10.1093/rof/rft004