Why do variance swaps exist?

dc.contributor.authorNieto, Belén
dc.contributor.authorNovales Cinca, Alfonso
dc.contributor.authorRubio, Gonzalo
dc.descriptionJEL classification: C13, C14, G10, G12
dc.description.abstractThis 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.
dc.description.facultyFac. de Ciencias Económicas y Empresariales
dc.description.facultyInstituto Complutense de Análisis Económico (ICAE)
dc.description.sponsorshipMinisterio de Ciencia e Innovación
dc.description.sponsorshipGeneralitat Valenciana
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dc.publisherFacultad de CC Económicas y Empresariales. Instituto Complutense de Análisis Económico
dc.relation.ispartofseriesDocumentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)
dc.rightsAtribución-NoComercial 3.0 España
dc.rights.accessRightsopen access
dc.subject.keywordVariance risk premium
dc.subject.keywordEconomic risks
dc.subject.ucmEconometría (Economía)
dc.subject.unesco5302 Econometría
dc.subject.unesco5307.14 Teoría Macroeconómica
dc.titleWhy do variance swaps exist?
dc.typetechnical report
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