Why do variance swaps exist?
This paper studies the determinants of the variance risk premium and concludes on the hedging possibilities offered by variance swaps. We start by showing that the variance risk premium responds to changes in higher order moments of the distribution of market returns. But the uncertainty that determ...
| Autores: | , , |
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| Tipo de recurso: | informe técnico |
| Fecha de publicación: | 2011 |
| País: | España |
| Institución: | Universidad Complutense de Madrid (UCM) |
| Repositorio: | Docta Complutense |
| Idioma: | inglés |
| OAI Identifier: | oai:docta.ucm.es:20.500.14352/48981 |
| Acceso en línea: | https://hdl.handle.net/20.500.14352/48981 |
| Access Level: | acceso abierto |
| Palabra clave: | Variance risk premium Non-normality Economic risks Hedging Econometría (Economía) Macroeconomía 5302 Econometría 5307.14 Teoría Macroeconómica |
| Sumario: | This paper studies the determinants of the variance risk premium and concludes on the hedging possibilities offered by variance swaps. We start by showing that the variance risk premium responds to changes in higher order moments of the distribution of market returns. But the uncertainty that determines the variance risk premium –the fear by investors to deviations from Normality in returns- is also strongly related to a variety of risks: risk of default, employment growth risk, consumption growth risk, stock market risk and market illiquidity risk. Therefore, the variance risk premium could be interpreted as reflecting the market willingness to pay for hedging against financial and macroeconomic sources of risk. We provide additional evidence in support of that view. |
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