G. DeSimone, P. A. Laux: The Timing of Variance Risk Premia Around Macroeconomic News Events

February 1, 2018

The majority of the variance risk premia is concentrated around the time of macroeconomic news announcements. Risk premia embodied in variance futures are negative around such events, consistent with theory. Risk premia in index option straddle positions are also negative around announcements, except that they are positive around Fed Open Market Committee (FOMC) meetings. Upon decomposing the straddle returns, we find that they primarily represent compensation for jump risk. On the other hand, the positive returns on FOMC meetings are due to extraordinary actions by the board to calm volatility.