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Volatility investing with variance swaps

Author

Listed:
  • Härdle, Wolfgang Karl
  • Silyakova, Elena

Abstract

Traditionally volatility is viewed as a measure of variability, or risk, of an underlying asset. However recently investors began to look at volatility from a different angle. It happened due to emergence of a market for new derivative instruments - variance swaps. In this paper first we introduse the general idea of the volatility trading using variance swaps. Then we describe valuation and hedging methodology for vanilla variance swaps as well as for the 3-rd generation volatility derivatives: gamma swaps, corridor variance swaps, conditional variance swaps. Finally we show the results of the performance investigation of one of the most popular volatility strategies - dispersion trading. The strategy was implemented using variance swaps on DAX and its constituents during the 5-years period from 2004 to 2008.

Suggested Citation

  • Härdle, Wolfgang Karl & Silyakova, Elena, 2010. "Volatility investing with variance swaps," SFB 649 Discussion Papers 2010-001, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2010-001
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    Citations

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    Cited by:

    1. Basteck, Christian & Daniëls, Tijmen R., 2010. "Every symmetric 3 x 3 global game of strategic complementarities is noise independent," SFB 649 Discussion Papers 2010-061, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    2. repec:hum:wpaper:sfb649dp2010-061 is not listed on IDEAS
    3. Sarac, Burak, 2021. "Varianzrisikoprämien auf deutsche Staatsanleihen [Variance Risk Premiums on German Government Bonds]," Junior Management Science (JUMS), Junior Management Science e. V., vol. 6(2), pages 370-392.
    4. Panov, Vladimir, 2010. "Estimation of the signal subspace without estimation of the inverse covariance matrix," SFB 649 Discussion Papers 2010-050, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    5. repec:hum:wpaper:sfb649dp2010-059 is not listed on IDEAS
    6. Schulze, Franziska, 2010. "Spatial dependencies in German matching functions," SFB 649 Discussion Papers 2010-054, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    7. Horst, Ulrich & Moreno-Bromberg, Santiago, 2010. "Efficiency and equilibria in games of optimal derivative design," SFB 649 Discussion Papers 2010-035, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    8. Grith, Maria & Krätschmer, Volker, 2010. "Parametric estimation of risk neutral density functions," SFB 649 Discussion Papers 2010-045, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    9. repec:hum:wpaper:sfb649dp2010-035 is not listed on IDEAS
    10. Härdle, Wolfgang Karl & Moro, Rouslan A. & Hoffmann, Linda, 2010. "Learning machines supporting bankruptcy prediction," SFB 649 Discussion Papers 2010-032, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    11. repec:hum:wpaper:sfb649dp2010-034 is not listed on IDEAS
    12. repec:hum:wpaper:sfb649dp2010-056 is not listed on IDEAS
    13. Wiebach, Nicole & Hildebrandt, Lutz, 2010. "Context effects as customer reaction on delisting of brands," SFB 649 Discussion Papers 2010-056, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    14. Hecht, Carolin & Hanewald, Katja, 2010. "Sociodemographic, economic, and psychological drivers of the demand for life insurance: Evidence from the German Retirement Income Act," SFB 649 Discussion Papers 2010-034, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    15. repec:hum:wpaper:sfb649dp2010-055 is not listed on IDEAS
    16. repec:hum:wpaper:sfb649dp2010-032 is not listed on IDEAS
    17. repec:hum:wpaper:sfb649dp2010-054 is not listed on IDEAS
    18. Nikolaus Hautsch & Peter Malec & Melanie Schienle, 2014. "Capturing the Zero: A New Class of Zero-Augmented Distributions and Multiplicative Error Processes," Journal of Financial Econometrics, Oxford University Press, vol. 12(1), pages 89-121.
    19. Mammen, Enno & Rothe, Christoph & Schienle, Melanie, 2010. "Nonparametric regression with nonparametrically generated covariates," SFB 649 Discussion Papers 2010-059, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    20. repec:hum:wpaper:sfb649dp2010-051 is not listed on IDEAS
    21. Sabiwalsky, Ralf, 2010. "Executive compensation regulation and the dynamics of the pay-performance sensitivity," SFB 649 Discussion Papers 2010-051, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    22. repec:hum:wpaper:sfb649dp2010-050 is not listed on IDEAS
    23. repec:hum:wpaper:sfb649dp2010-045 is not listed on IDEAS

    More about this item

    Keywords

    Conditional Variance Swap; Corridor Variance Swap; Dispersion Trading; Gamma Swap; Variance Swap; Volatility Replication; Volatility Trading;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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