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The rise and fall of S&P500 variance futures

  • Chang, Chia-Lin
  • Jimenez-Martin, Juan-Angel
  • McAleer, Michael
  • Amaral, Teodosio Perez

Modelling, monitoring and forecasting volatility are indispensible to sensible portfolio risk management. The volatility of an asset of composite index can be traded by using volatility derivatives, such as volatility and variance swaps, options and futures. The most popular volatility index is VIX, which is a key measure of market expectations of volatility, and hence also an important barometer of investor sentiment and market volatility. Investors interpret the VIX cash index as a “fear” index, and of VIX options and VIX futures as derivatives of the “fear” index. VIX is based on S&P500 call and put options over a wide range of strike prices, and hence is not model based. Speculators can trade on volatility risk with VIX derivatives, with views on whether volatility will increase or decrease in the future, while hedgers can use volatility derivatives to avoid exposure to volatility risk. VIX and its options and futures derivatives has been widely analysed in recent years. An alternative volatility derivative to VIX is the S&P500 variance futures, which is an expectation of the variance of the S&P500 cash index. Variance futures are futures contracts written on realized variance, or standardized variance swaps. The S&P500 variance futures are not model based, so the assumptions underlying the index do not seem to have been clearly understood. As variance futures are typically thinly traded, their returns and volatility are not easy to model accurately using a variety of volatility model specifications. This paper analyses the volatility in S&P500 3-month and 12-month variance futures Before, During and After the GFC, as well as for the full data period, for each of three alternative conditional volatility models and three densities, in order to determine whether exposure to risk can be incorporated into a financial portfolio without taking positions on the S&P500 index itself.

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Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 25 (2013)
Issue (Month): C ()
Pages: 151-167

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Handle: RePEc:eee:ecofin:v:25:y:2013:i:c:p:151-167
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620163

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  6. Juan-Ángel Jiménez-Martín & Michael McAleer & Teodosio Pérez-Amaral, 2009. "Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis?," Documentos de Trabajo del ICAE 0918, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
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  14. Ishida, I. & McAleer, M.J. & Oya, K., 2011. "Estimating the Leverage Parameter of Continuous-time Stochastic Volatility Models Using High Frequency S&P 500 VIX," Econometric Institute Research Papers EI 2011-10, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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