Affine Variance Swap Curve Models

Damir Filipović
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Damir Filipović: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute

No 12-14, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper provides a brief overview of the stochastic modeling of variance swap curves. Focus is on affine factor models. We propose a novel drift parametrization which assures that the components of the state process can be matched with any pre-specified points on the variance swap curve. This should facilitate the empirical estimation for such stochastic models. Moreover, sufficient and yet flexible conditions that guarantee positivity of the rates are readily available. We finally discuss the relation and differences to affine yield-factor models introduced by Duffie and Kan. It turns out that, in contrast to variance swap models, their yield factor representation requires imposing constraints on systems of nonlinear equations that are often not solvable in closed form.

Keywords: Affine variance swap rate factor models; Variance swaps; VIX (search for similar items in EconPapers)
JEL-codes: C51 G13 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2012-04
New Economics Papers: this item is included in nep-ecm and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1214

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