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Volatility Derivatives

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Author Info

  • Peter Carr
  • Roger Lee

    ()
    (Bloomberg/NYU, New York, NY 10022
    Department of Mathematics, University of Chicago, Chicago, Illinois 60637)

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    Abstract

    Volatility derivatives are a class of derivative securities where the payoff explicitly depends on some measure of the volatility of an underlying asset. Prominent examples of these derivatives include variance swaps and VIX futures and options. We provide an overview of the current market for these derivatives. We also survey the early literature on the subject. Finally, we provide relatively simple proofs of some fundamental results related to variance swaps and volatility swaps.

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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev.financial.050808.114304
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    Bibliographic Info

    Article provided by Annual Reviews in its journal Annual Review of Financial Economics.

    Volume (Year): 1 (2009)
    Issue (Month): 1 (November)
    Pages: 319-339

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    Handle: RePEc:anr:refeco:v:1:y:2009:p:319-339

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    Related research

    Keywords: variance swap; volatility swap; realized variance; realized volatility; implied volatility;

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    Cited by:
    1. Larry G. Epstein & Shaolin Ji, 2013. "Ambiguous volatility and asset pricing in continuous time," Papers 1301.4614, arXiv.org.
    2. Leunglung Chan & Eckhard Platen, 2010. "Exact Pricing and Hedging Formulas of Long Dated Variance Swaps under a $3/2$ Volatility Model," Papers 1007.2968, arXiv.org, revised Jan 2011.
    3. Zhou, Yinggang, 2014. "Modeling the joint dynamics of risk-neutral stock index and bond yield volatilities," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 216-228.
    4. Guang-Hua Lian & Song-Ping Zhu, 2013. "Pricing VIX options with stochastic volatility and random jumps," Decisions in Economics and Finance, Springer, vol. 36(1), pages 71-88, May.
    5. Carol Alexander & Johannes Rauch, 2014. "Discretisation-Invariant Swaps," Papers 1404.1351, arXiv.org.
    6. Fernandes, Marcelo & Medeiros, Marcelo C. & Scharth, Marcel, 2013. "Modeling and predicting the CBOE market volatility index," Textos para discussão 342, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    7. Della Corte, Pasquale & Sarno, Lucio & Tsiakas, Ilias, 2011. "Spot and forward volatility in foreign exchange," Journal of Financial Economics, Elsevier, vol. 100(3), pages 496-513, June.
    8. Diop, Assane & Jacod, Jean & Todorov, Viktor, 2013. "Central Limit Theorems for approximate quadratic variations of pure jump Itô semimartingales," Stochastic Processes and their Applications, Elsevier, vol. 123(3), pages 839-886.
    9. Robert Jarrow & Younes Kchia & Martin Larsson & Philip Protter, 2013. "Discretely sampled variance and volatility swaps versus their continuous approximations," Finance and Stochastics, Springer, vol. 17(2), pages 305-324, April.
    10. Fernandes, Marcelo & Medeiros, Marcelo C. & Scharth, Marcel, 2014. "Modeling and predicting the CBOE market volatility index," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 1-10.
    11. Giovanni Salvi & Anatoliy V. Swishchuk, 2012. "Modeling and Pricing of Covariance and Correlation Swaps for Financial Markets with Semi-Markov Volatilities," Papers 1205.5565, arXiv.org.
    12. Cheng, Jun & Ibraimi, Meriton & Leippold, Markus & Zhang, Jin E., 2012. "A remark on Lin and Chang's paper ‘Consistent modeling of S&P 500 and VIX derivatives’," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 708-715.
    13. Alejandro Balbás & Iván Blanco & Eliseo Navarro, 2013. "Equity, commodity and interest rate volatility derivatives," Business Economics Working Papers id-13-02, Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester".

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