Research Project 7

RP7. Modelling and estimation of the price of volatility risk (Ye Yue)

Leading Partner: TUT. Supervisor: Prof. Juho Kanniainen

Empirically, the price of volatility risk (or the volatility risk-premium) is negative, and there is a theoretical relation to the price of risk, i.e., the risk-return trade-off parameter. This RP investigates the price of volatility risk and its relations to the expected rate of returns theoretically and empirically. In particular, the recent empirical evidence of a significantly negative relation between expected return and volatility risk motivates us to consider stochastic investment opportunity with an intertemporal hedging component to hedge against changes in forecasts of future market volatilities in the ICAPM framework.[1] This RP is closely related to RPs 6 and 8 and indirectly to RPs 1-5 and depending on assumptions behind the models, this project may border on high-performance platforms and is related to RP 11-15.

[1] See Bali, T. G., and R. Engle, 2010, “The Intertemporal Capital Asset Pricing Model with Dynamic Conditional Correlations,” Journal of Monetary Economics, 57, 377–390.

 

Results

Deliverables

DELIVERABLE 3.4 on project 7 (Y. Yue, TUT): "Variance Risk Premium: Estimation, Term Structure and Equity Risk Premium Predictability" [download]

Presentations

Gnameho, K.K., "Modeling Volatility Risk Premium" with prof. Juho Kanniainen & Ye Yue, Mathematical and Statistical Methods for Actuarial Science and
Finance, Paris 30 March - 1 April 2016

Final conference

Ye Yue (Tampere University of Technology) : News Impact on Variance Term Structure and Jumps