Quadratic variance swap models

Damir Filipović, Elise Gourier and Loriano Mancini

Journal of Financial Economics, 2016, vol. 119, issue 1, 44-68

Abstract: 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.

Keywords: Stochastic volatility; Variance swap; Quadratic term structure; Quadratic jump-diffusion; Dynamic optimal portfolio (search for similar items in EconPapers)
JEL-codes: C51 G13 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (48)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:119:y:2016:i:1:p:44-68

DOI: 10.1016/j.jfineco.2015.08.015

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