Nieto, Belén and Novales Cinca, Alfonso and Rubio, Gonzalo (2011) Why do variance swaps exist? [Working Paper or Technical Report] (Unpublished)
Available under License Creative Commons Attribution Non-commercial.
Official URL: http://eprints.ucm.es/12520/
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.
|Item Type:||Working Paper or Technical Report|
|Additional Information:||JEL classification: C13, C14, G10, G12|
|Uncontrolled Keywords:||Variance risk premium, Non-normality, Economic risks, Hedging|
|Subjects:||Social sciences > Economics > Econometrics|
Social sciences > Economics > Macroeconomics
|Series Name:||Documentos de trabajo del Instituto Complutense de Análisis Económico|
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|Deposited On:||04 Apr 2011 10:44|
|Last Modified:||11 Apr 2011 11:09|
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