Working Paper: NBER ID: w16884
Authors: Ian Martin
Abstract: The large asset price jumps that took place during 2008 and 2009 disrupted volatility derivatives markets and caused the single-name variance swap market to dry up completely. This paper defines and analyzes a simple variance swap, a relative of the variance swap that in several respects has more desirable properties. First, simple variance swaps are robust: they can be easily priced and hedged even if prices can jump. Second, simple variance swaps supply a more accurate measure of market-implied variance than do variance swaps or the VIX index. Third, simple variance swaps provide a better way to measure and to trade correlation. The paper also explains how to interpret VIX in the presence of jumps.
Keywords: No keywords provided
JEL Codes: G01; G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price jumps (D49) | robustness of hedging strategy (G13) |
| type of swap (F33) | accuracy of variance measurement (C52) |
| type of swap (F33) | effectiveness in trading correlation (C10) |