Asset Pricing Implications of Volatility Term Structure Risk

Download or read book Asset Pricing Implications of Volatility Term Structure Risk written by Chen Xie and published by . This book was released on 2014 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: I find that stocks with high sensitivities to changes in the VIX slope exhibit high returns on average. The price of VIX slope risk is approximately 2.5% annually, statistically significant and cannot be explained by other common factors, such as the market excess return, size, book-to-market, momentum, liquidity, market volatility, and the variance risk premium. I provide a theoretical model that supports my empirical results. The model extends current rare disaster models to include disasters of different lengths. My model implies that a downward sloping VIX term structure anticipates a potential long disaster and vice versa.