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The term structure of variance swap rates and optimal variance swap investments


Egloff, Daniel; Leippold, Markus; Wu, Liuren (2010). The term structure of variance swap rates and optimal variance swap investments. Journal of Financial and Quantitative Analysis, 45(5):1279-1310.

Abstract

This paper performs specification analysis on the term structure of variance swap rates on the S&P 500 index and studies the optimal investment decision on the variance swaps and the stock index. The analysis identifies two stochastic variance risk factors, which govern the short and long end of the variance swap term structure variation, respectively. The highly negative estimate for the market price of variance risk makes it optimal for an investor to take short positions in a short-term variance swap contract, long positions in a long-term variance swap contract, and short positions in the stock index.

Abstract

This paper performs specification analysis on the term structure of variance swap rates on the S&P 500 index and studies the optimal investment decision on the variance swaps and the stock index. The analysis identifies two stochastic variance risk factors, which govern the short and long end of the variance swap term structure variation, respectively. The highly negative estimate for the market price of variance risk makes it optimal for an investor to take short positions in a short-term variance swap contract, long positions in a long-term variance swap contract, and short positions in the stock index.

Citations

37 citations in Web of Science®
43 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2010
Deposited On:30 Oct 2009 07:16
Last Modified:05 Apr 2016 13:30
Publisher:Cambridge University Press
ISSN:0022-1090
Additional Information:Copyright: University of Washington Michael G. Foster School of Business
Publisher DOI:https://doi.org/10.1017/S0022109010000463
Related URLs:http://depts.washington.edu/jfqa/ (Publisher)

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