Article by: Peter Carr, Liuren Wu
Published by: Review of Financial Studies
Date: 2008
“We propose a direct and robust method for quantifying the variance risk premium on
financial assets. We show that the risk-neutral expected value of return variance, also
known as the variance swap rate, is well approximated by the value of a particular portfolio
of options.We propose to use the difference between the realized variance and this synthetic
variance swap rate to quantify the variance risk premium. Using a large options data set,
we synthesize variance swap rates and investigate the historical behavior of variance risk
premiums on five stock indexes and 35 individual stocks.”
Full article (PDF): Link