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Why do variance swaps exist?

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Nieto, Belén and Novales Cinca, Alfonso and Rubio, Gonzalo (2011) Why do variance swaps exist? [ Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 06, 2011, ] (Unpublished)

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Official URL: http://eprints.ucm.es/12520/


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Abstract

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 (ICAE)
Volume:2011
Number:06
ID Code:12520
Deposited On:04 Apr 2011 08:44
Last Modified:12 Mar 2014 10:52

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