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Risk Premia and the VIX Term Structure

Published online by Cambridge University Press:  27 December 2017

Travis L. Johnson
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Abstract

The shape of the Chicago Board Options Exchange Volatility Index (VIX) term structure conveys information about the price of variance risk rather than expected changes in the VIX, a rejection of the expectations hypothesis. The second principal component, SLOPE, summarizes nearly all this information, predicting the excess returns of synthetic Standard & Poor’s (S&P) 500 variance swaps, VIX futures, and S&P 500 straddles for all maturities and to the exclusion of the rest of the term structure. SLOPE’s predictability is incremental to other proxies for the conditional variance risk premia, economically significant, and inconsistent with standard asset pricing models.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 6 , December 2017 , pp. 2461 - 2490
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

I thank Anat Admati, Mary Barth, Hendrik Bessembinder (the editor), Bjorn Eraker, Sebastian Infante, Bryan Kelly (the referee), Arthur Korteweg, Kristoffer Laursen, Ian Martin, Stefan Nagel, Paul Pfleiderer, Monika Piazzesi, Jan Schneider, Ken Singleton, Eric So, Suhas Sridharan, Mitch Towner, and seminar participants at Boston College, Dartmouth College, Rice University, Stanford University, University of California–Berkeley, University of Houston, University of Maryland, University of Pennsylvania, University of Rochester, University of Texas at Austin, and University of Wisconsin–Madison for their helpful comments. This paper is based on my dissertation at Stanford University titled “Essays on Information in Options Markets.”

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