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research article
Quadratic variance swap models
We introduce a novel class of term structure models for variance swaps. The multivariate state process is characterized by a quadratic diffusion function. The variance swap curve is quadratic in the state variable and available in closed form, greatly facilitating empirical analysis. Various goodness-of-fit tests show that quadratic models fit variance swaps on the S&P 500 remarkably well, and outperform affine models. We solve a dynamic optimal portfolio problem in variance swaps, index option, stock index and bond. An empirical analysis uncovers robust features of the optimal investment strategy. (C) 2015 The Authors. Published by Elsevier B.V.
Type
research article
Web of Science ID
WOS:000367114400003
Authors
Publication date
2016
Publisher
Published in
Volume
119
Issue
1
Start page
44
End page
68
Peer reviewed
REVIEWED
Available on Infoscience
February 16, 2016
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