Asset Pricing Implications of Volatility Term Structure Risk

I provide a systematic investigation of whether the volatility term structure of the market re-turn is priced in the cross-section of stock returns. I analyze the exposure of cross-sectional stock returns to risk captured by the V IX term structure. I find that stocks with high sensitivities to changes in the V IX slope exhibit high returns on average. The estimated premium for bearing V IX slope risk is 2.52 % annually. This V IX slope risk premium is economically significant and cannot be explained by other common risk factors, such as the market beta, size, book-to-market, momentum, liquidity, V IX, and the variance risk pre-mium. I provide a theoretical model that explains my empirical results by connecting the V IX slope with the duration of a severe economic downturn. I develop a regime-switching rare disaster model, extending current rare disaster models to include the duration of disas-ters. My model implies that an upward sloping V IX term structure anticipates a shorter potential disaster, while a flatter one anticipates a longer potential disaster. I