Modeling Volatility Risk Premium

Posted: 24 Mar 2016

See all articles by Kossi Gnameho

Kossi Gnameho

Maastricht University - Department of Quantitative Economics

Juho Kanniainen

Tampere University

Ye Yue

Tampere University

Date Written: February 23, 2016

Abstract

The bias between the expected realised variance under the historical measure and the risk neutral probability introduces the concept of the risk premium. How does the market variance risk premium vary over time or look like in the future? Our work introduced a probabilistic modeling of the variance risk premium (VRP) via a parametric stochastic volatility model. Our framework deals with the class of non-affine continuous time diffusions of the spot-variance process. We give a general backward stochastic representation of the VRP via some basis of Malliavin Calculus. We provide two applications: the first discusses an affine case of stochastic volatility model and the second models the VRP in the framework of the non-affine stochastic volatility model.

Keywords: Martingale, Malliavin, Risk premium

JEL Classification: C30, G17

Suggested Citation

Gnameho, Kossi and Kanniainen, Juho and Yue, Ye, Modeling Volatility Risk Premium (February 23, 2016). Available at SSRN: https://ssrn.com/abstract=2737000

Kossi Gnameho (Contact Author)

Maastricht University - Department of Quantitative Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Juho Kanniainen

Tampere University ( email )

P.O. 541, Korkeakoulunkatu 8 (Festia building)
Tampere, FI-33101
Finland

HOME PAGE: http://https://sites.google.com/site/juhokanniainen/

Ye Yue

Tampere University ( email )

Korkeakoulunkatu 8
Tampere, 33720
Finland

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