University of Sussex
Browse
__smbhome.uscs.susx.ac.uk_qlfd7_Desktop_Arithmetic Variance Swaps_OAversion.pdf (1.26 MB)

Arithmetic variance swaps

Download (1.26 MB)
journal contribution
posted on 2023-06-09, 02:28 authored by Stamatis Leontsinis, Carol AlexanderCarol Alexander
Biases in standard variance swap rates can induce substantial deviations below market rates. Defining realised variance as the sum of squared price (not log-price) changes yields an `arithmetic' variance swap with no such biases. Its fair value has advantages over the standard variance swap rate: no discrete-monitoring or jump biases; and the same value applies for any monitoring frequency, even irregular monitoring and to any underlying, including those taking zero or negative values. We derive the fair-value for the arithmetic variance swap and compare with the standard variance swap rate by: analysing errors introduced by interpolation and integration techniques; numerical experiments for approximation accuracy; and using 23 years of FTSE 100 options data to explore the empirical properties of arithmetic variance (and higher-moment) swaps. The FTSE 100 variance risk has a strong negative correlation with the implied third moment, which can be captured using a higher-moment arithmetic swap.

History

Publication status

  • Published

File Version

  • Accepted version

Journal

Quantitative Finance

ISSN

1469-7688

Publisher

Taylor & Francis

Issue

4

Volume

17

Page range

551-569

Department affiliated with

  • Business and Management Publications

Full text available

  • Yes

Peer reviewed?

  • Yes

Legacy Posted Date

2016-08-09

First Open Access (FOA) Date

2018-03-09

First Compliant Deposit (FCD) Date

2016-08-09

Usage metrics

    University of Sussex (Publications)

    Categories

    No categories selected

    Exports

    RefWorks
    BibTeX
    Ref. manager
    Endnote
    DataCite
    NLM
    DC