The Smile of the Volatility Risk Premia
By Ilia Bouchouev, Ph.D., Managing Partner, Pentathlon Investments and Member of the GCARD’s Editorial Advisory Board and Brett Johnson, Vice President, Cboe Global Markets
The paper presents selected results from the comprehensive study of the volatility risk premium (VRP) in the oil market. We introduce the smile of VRP that represents variation in profitability and risk of this systematic strategy across option moneyness and maturities. We identify the structural break in VRP evolution over time driven by behavioral changes among producer hedgers and the securitization of the strategy by financial institutions.
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