scholarly journals Hedging (Co)Variance Risk with Variance Swaps

2008 ◽  
Author(s):  
José Da Fonseca ◽  
Martino Grasselli ◽  
Florian Ielpo
Keyword(s):  
Variance Swaps ◽  
Variance Risk

Risk Premia and the VIX Term Structure

2017 ◽  
Vol 52 (6) ◽  
pp. 2461-2490 ◽  
Author(s):  
Travis L. Johnson
Keyword(s):  
Term Structure ◽  
Principal Component ◽  
Risk Premia ◽  
Expectations Hypothesis ◽  
Variance Swaps ◽  
Volatility Index ◽  
Asset Pricing Models ◽  
Vix Futures ◽  
Synthetic Standard ◽  
Variance Risk

The shape of the Chicago Board Options Exchange Volatility Index (VIX) term structure conveys information about the price of variance risk rather than expected changes in the VIX, a rejection of the expectations hypothesis. The second principal component, SLOPE, summarizes nearly all this information, predicting the excess returns of synthetic Standard & Poor’s (S&P) 500 variance swaps, VIX futures, and S&P 500 straddles for all maturities and to the exclusion of the rest of the term structure. SLOPE’s predictability is incremental to other proxies for the conditional variance risk premia, economically significant, and inconsistent with standard asset pricing models.

scholarly journals HEDGING (CO)VARIANCE RISK WITH VARIANCE SWAPS

2011 ◽  
Vol 14 (06) ◽  
pp. 899-943 ◽  
Author(s):  
JOSÉ DA FONSECA ◽  
MARTINO GRASSELLI ◽  
FLORIAN IELPO
Keyword(s):  
Asset Allocation ◽  
Market Price ◽  
Real Data ◽  
Model Parameters ◽  
Variance Swaps ◽  
Stochastic Correlation ◽  
Variance Risk ◽  
Portfolio Optimization Problem ◽  
The Impact ◽  
Derivative Products

In this paper, we quantify the impact on the representative agent's welfare of the presence of derivative products spanning covariance risk. In an asset allocation framework with stochastic (co)variances, we allow the agent to invest not only in the stocks but also in the associated variance swaps. We solve this optimal portfolio allocation program using the Wishart Affine Stochastic Correlation framework, as introduced in Da Fonseca, Grasselli and Tebaldi (2007): it shares the analytical tractability of the single-asset counterpart represented by the [36] model and it seems to be the natural framework for studying multivariate problems when volatilities as well as correlations are stochastic. What is more, this framework shows how variance swaps can implicitly span the covariance risk. We provide the explicit solution to the portfolio optimization problem and we discuss the structure of the portfolio loadings with respect to model parameters. Using real data on major indexes, we find that the impact of covariance risk on the optimal strategy is huge. It first leads to a portfolio that is mostly driven by the market price of volatility-covolatility risks. It is then strongly leveraged through variance swaps, thus leading to a much higher utility, when compared to the case when investing in such derivatives is not possible.

scholarly journals Hedging (Co)Variance Risk with Variance Swaps

2009 ◽  
Author(s):  
José Da Fonseca ◽  
Florian Ielpo ◽  
Martino Grasselli
Keyword(s):  
Variance Swaps ◽  
Variance Risk

The Variance Swaps based on KOSPI200 Index and the Term Structure of Variance Risk Premium

2013 ◽  
Vol 21 (4) ◽  
pp. 435-463
Author(s):  
Young Ho Eom ◽  
Woon Wook Jang
Keyword(s):  
Risk Factors ◽  
Term Structure ◽  
Risk Premium ◽  
Risk Averse ◽  
Realized Variance ◽  
Over The Counter ◽  
Variance Swaps ◽  
Variance Swap ◽  
Variance Risk Premium ◽  
Variance Risk

This study examines whether the variance risk is a priced risk factor in Korea using the over-the-counter variance swap quotes and realized variance data. We also study the term structure of variance risk premium. The empirical results show that the model with 2 stochastic variance risk factors with jumps in return is required to fit the variance swap and realized variance data. The analyses with the estimated models suggest that the variance risk premium in Korea are highly negative and the size of the premium increase with the maturities, meaning that risk averse investors in Korea are willing to pay a premium to hedge variance risk.

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