Advanced Search
MyIDEAS: Login to save this article or follow this journal

Model-independent hedging strategies for variance swaps

Contents:

Author Info

  • David Hobson

    ()

  • Martin Klimmek

    ()

Registered author(s):

    Abstract

    A variance swap is a derivative with a path-dependent payoff which allows investors to take positions on the future variability of an asset. In the idealised setting of a continuously monitored variance swap written on an asset with continuous paths, it is well known that the variance swap payoff can be replicated exactly using a portfolio of puts and calls and a dynamic position in the asset. This fact forms the basis of the VIX contract. But what if we are in the more realistic setting where the contract is based on discrete monitoring, and the underlying asset may have jumps? We show that it is possible to derive model-independent, no-arbitrage bounds on the price of the variance swap, and corresponding sub- and super-replicating strategies. Further, we characterise the optimal bounds. The form of the hedges depends crucially on the kernel used to define the variance swap. Copyright Springer-Verlag 2012

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://hdl.handle.net/10.1007/s00780-012-0190-3
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 16 (2012)
    Issue (Month): 4 (October)
    Pages: 611-649

    as in new window
    Handle: RePEc:spr:finsto:v:16:y:2012:i:4:p:611-649

    Contact details of provider:
    Web page: http://www.springerlink.com/content/101164/

    Order Information:
    Web: http://link.springer.de/orders.htm

    Related research

    Keywords: Variance swaps; Jumps; Hedging strategies; Skorokhod embedding; No-arbitrage prices; Model-independent bounds; 91G20; 60G40; G13;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Peter Carr & Roger Lee & Liuren Wu, 2012. "Variance swaps on time-changed Lévy processes," Finance and Stochastics, Springer, Springer, vol. 16(2), pages 335-355, April.
    2. Bick, Avi & Willinger, Walter, 1994. "Dynamic spanning without probabilities," Stochastic Processes and their Applications, Elsevier, Elsevier, vol. 50(2), pages 349-374, April.
    3. Ian Martin, 2011. "Simple Variance Swaps," NBER Working Papers 16884, National Bureau of Economic Research, Inc.
    4. Mark Broadie & Ashish Jain, 2008. "The Effect Of Jumps And Discrete Sampling On Volatility And Variance Swaps," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., vol. 11(08), pages 761-797.
    5. David G. Hobson, 1998. "Robust hedging of the lookback option," Finance and Stochastics, Springer, Springer, vol. 2(4), pages 329-347.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Mathias Beiglböck & Pierre Henry-Labordère & Friedrich Penkner, 2013. "Model-independent bounds for option prices—a mass transport approach," Finance and Stochastics, Springer, Springer, vol. 17(3), pages 477-501, July.
    2. Y. Dolinsky & H. M. Soner, 2014. "Martingale optimal transport in the Skorokhod space," Papers 1404.1516, arXiv.org.
    3. Beatrice Acciaio & Mathias Beiglb\"ock & Friedrich Penkner & Walter Schachermayer, 2013. "A model-free version of the fundamental theorem of asset pricing and the super-replication theorem," Papers 1301.5568, arXiv.org, revised Mar 2013.
    4. Alexander M. G. Cox & Jiajie Wang, 2013. "Optimal robust bounds for variance options," Papers 1308.4363, arXiv.org.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:spr:finsto:v:16:y:2012:i:4:p:611-649. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.