The cross-sectional variation of volatility risk premia

This paper analyzes the determinants of the cross-sectional variation of the average volatility risk premia for a representative set of portfolios sorted by volatility risk premium beta. The market volatility risk premium and, especially, the default premium are shown to be key risk factors in the cross-sectional variation of average volatility risk premium payoffs. The cross-sectional variation of risk premia seems to reflect a very different behavior of the underlying components of our sample portfolios with respect to credit or financial stress that generates a significant dispersion of the volatility swap pricing of these securities.The authors acknowledge financial support from the Ministry of Economics and Competitiveness through Grant ECO2012-34268. In addition, Gonzalo Rubio acknowledges financial support from Generalitat Valenciana Grant PROMETEOII/2013/015, and Ana González-Urteaga acknowledges financial support from the Ministry of Economics and Competitiveness through Grant ECO2012-35946