Variance risk premiums and aging firms

Abstract

In this paper, I investigate how variance risk premiums change as firms age. Negative variance risk premiums represent profits that, on average, accrue to traders willing to sell option protection to other investors. Although typical risk measures decrease as firms age, my results suggest that as firms become older their variance risk premiums decrease. This effect is not explained by option-implied risk measures, fundamental factors, and an option mispricing proxy. This result is also robust across several sample splits based on option market liquidity and the result is not explained by initial public offerings.