Riding the swaption curve

Johan Duyvesteyn and Gerben de Zwart

Journal of Banking & Finance, 2015, vol. 59, issue C, 57-75

Abstract: We conduct an empirical analysis of the term structure in the volatility risk premium in the fixed income market by constructing long-short combinations of two at-the-money straddles for the four major swaption markets (USD, JPY, EUR and GBP). Our findings are consistent with a concave, upward-sloping maturity structure for all markets, with the largest negative premium for the shortest term maturity. The fact that both delta–vega and delta–gamma neutral straddle combinations earn positive returns that seem uncorrelated suggests that the term structure is affected by both jump risk and volatility risk. The results seem robust for macroeconomic announcements and the specific model choice to estimate the risk exposures for hedging.

Keywords: Volatility risk premium; Term structure; Swaptions; Straddles; Bonds; Interest rate derivatives (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:59:y:2015:i:c:p:57-75

DOI: 10.1016/j.jbankfin.2015.05.012

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