The Equity Premium, Variance Premium and the Maturity Structure of Uncertainty

Review of Finance 18 (1), 2014

With Bruno Feunou, Abderrahim Taamouti and Roméo Tédongap. The paper is here: The Equity Premium and the Maturity Structure of Uncertainty. The trade-offs between risk and returns vary with the investment horizons. The term structure of moments, measurable from option prices, can reveal the risk-returns trade-off associated with Long-Run Risk or Stochastic Volatility factors. Intuitively, we can study the dynamics of hard-to-measure risk factors via their impacts on the term structure of variance and other moments. As predicted by theory, we extract a small number of risk factors with substantial predictive power for the Equity Premium and the Variance Premium. These summarize the compensation for risks implicit in the Equity Premium and the Variance Premium at different horizons.