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Is the Variance Swap Rate Affine in the Spot Variance? Evidence from S&P500 Data

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  • M.E. Mancino
  • S. Scotti
  • G. Toscano

Abstract

We empirically investigate the functional link between the variance swap rate and the spot variance. Using S&P500 data over the period 2006–2018, we find overwhelming empirical evidence supporting the affine link implied by exponential affine stochastic volatility models. Tests on yearly subsamples suggest that exponential mean-reverting variance models provide a good fit during periods of extreme volatility, while polynomial modelsare suited for years characterized by more frequent price jumps.

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  • M.E. Mancino & S. Scotti & G. Toscano, 2020. "Is the Variance Swap Rate Affine in the Spot Variance? Evidence from S&P500 Data," Applied Mathematical Finance, Taylor & Francis Journals, vol. 27(4), pages 288-316, July.
    • Handle: RePEc:taf:apmtfi:v:27:y:2020:i:4:p:288-316
    DOI: 10.1080/1350486X.2020.1847671
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