Term Structure Of IVX And 50ETF Variance Premium

This paper studied the term structure of 50 ETF model-free volatility(iVX)and 50 ETF variance premium,as well as their predictive relationship.The first three principal components of the iVX term structure is recognized as Level,Slope and Curvature,which makes good economical sense.By testing against and rejecting expectation hypothesis on iVX term structure,we establish the existence of variance premium.Daily-and monthly-returns of two kinds of variance assets,namely synthetic variance swaps and straddles,are calculated and then decomposed using two different methods to obtain the daily returns induced by variance premium of each assets.Both methods provide strong evidence of negative variance premium returns.By regressing next-day variance premium returns on the principal components(PC)of iVX term structure,the first two PCs are shown to be driving forces of variance premium.Higher PC1 results in lower next-day variance premium returns,while higher PC1 usually leads to higher next-day variance premium returns.