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Title: Variance and jump risks in financial markets
Author: Simen, Chardin Wese
Awarding Body: University of Reading
Current Institution: University of Reading
Date of Award: 2013
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This thesis investigates variance and jump risks in financial markets. Chapter 1 introduces these two concepts. Following this overview, Chapter 2 presents a thorough analysis of the compensation required by investors for their exposure to commodity variance risk. We analyze the payoffs of variance swaps of 21 prominent commodity markets over more than 20 years and find significant variance risk premia in 18 out of 21 markets. We show that commodity variance risk premia are negative, time-varying and their magnitudes increase with variance. Although classical and state-of-the-art factor models cannot explain variations in commodity variance risk premia satisfactorily, we document a significant relation between variance risk premia and macroeconomic beliefs. Chapter 3 builds on the findings of Chapter 2 to study the implication of the volatility risk premium for volatility forecasting. The volatility risk premium drives a wedge between the volatility implied from the risk-neutral probability measure and subsequently realized under the physical probability measure, making implied volatility a biased forecast of realized volatility. We introduce a non-parametric and parsimonious approach to adjust the model-free implied volatility for the volatility risk premium and implement this methodology using more than 20 years of options and futures data on three major energy markets.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available