Variance and skew risk premiums for the volatility market: The VIX evidence |
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Authors: | José Da Fonseca Yahua Xu |
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Affiliation: | 1. Department of Finance, Business School, Auckland University of Technology, Auckland, New Zealand;2. China Economics and Management Academy, Central University of Finance and Economics, Beijing, China |
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Abstract: | We extract variance and skew risk premiums from volatility derivatives in a model-free way and analyze their relationships along with volatility index and equity index returns. These risk premiums can be synthesized through option trading strategies. Using a time series of option prices on the VIX, we find that variance swap excess return can be partially explained by volatility index and equity index excess returns while these latter variables carry little information for the skew swap excess return. The results sharply contrast with those obtained for the equity index option market underlining very specific characteristics of the volatility derivative market. |
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Keywords: | risk premiums skew swap VIX option market variance swap |
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