A PROPOSAL FOR MULTI-ASSET GENERALIZED VARIANCE SWAPS

Subhojit Biswas () and Diganta Mukherjee ()
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Subhojit Biswas: Indian Statistical Institute, Kolkata, India
Diganta Mukherjee: Sampling and Official Statistics Unit, Indian Statistical Institute, Kolkata, India

Annals of Financial Economics (AFE), 2019, vol. 14, issue 04, 1-29

Abstract: This paper proposes swaps on two important new measures of generalized variance, namely the maximum eigenvalue and trace of the covariance matrix of the assets involved. We price these generalized variance swaps for financial markets with Markov-modulated volatilities. We consider multiple assets in the portfolio for theoretical purpose and demonstrate our approach with numerical examples taking three stocks in the portfolio. The results obtained in this paper have important implications for the commodity sector where such swaps would be useful for hedging risk.

Keywords: Generalized variance; swaps; trace; maximum eigenvalue (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S2010495219500192

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