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P. Van Tassel: Relative Pricing and Risk Premia in Equity Volatility Markets

September 1, 2018

This paper provides empirical evidence that volatility markets are integrated through the time-varying term-structure of variance risk premia. These risk premia predict the returns from selling volatility for different horizons, maturities, and products including variance swaps, straddles, and VIX futures. In addition, the paper derives a closed form relationship between the prices of variance swaps and VIX futures. While tightly linked, VIX futures exhibit deviations of varying significance from the no-arbitrage prices and bounds implied by the variance swap market.

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