Using high-frequency stock market data and (synthetic) variance swap rates, this paper identifies and investigates the temporal variation in the market variance risk-premium. The variance risk is manifest in two salient features of financial returns: stochastic volatility and jumps. The pricing of these two components is analyzed in a general semiparametric framework. The key empirical results imply that investors' fears of future jumps are especially sensitive to recent jump activity and that their willingness to pay for protection against jumps increases significantly immediately after the occurrence of jumps. This in turn suggests that time-varying risk aversion, as previously documented in the literature, is primarily driven by large, or extreme, market moves. The dynamics of risk-neutral jump intensity extracted from deep out-of-the-money put options confirms these findings. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
