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The Rise and Fall of S&P500 Variance Futures

  • Chia-Lin Chang

    (Department of Applied Economics Department of Finance National Chung Hsing University Taichung, Taiwan)

  • Juan-Ángel Jiménez-Martín

    (Department of Quantitative Economics Complutense University of Madrid)

  • Michael McAleer

    ()

    (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, Complutense University of Madrid, and Institute of Economic Research, Kyoto University)

  • Teodosio Pérez-Amaral

    (Department of Quantitative Economics Complutense University of Madrid)

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 model specifications. This paper analyses the volatility in S&P500 3-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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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP795.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 795.

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Length: 25pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:kyo:wpaper:795
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  1. Michael McAleer & Juan-Angel Jimenez-Martin & Teodosio Perez-Amaral, 2009. "Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis?," CIRJE F-Series CIRJE-F-643, CIRJE, Faculty of Economics, University of Tokyo.
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