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Simple Variance Swaps


  • Ian Martin


The large asset price jumps that took place during 2008 and 2009 disrupted volatility derivatives markets and caused the single-name variance swap market to dry up completely. This paper defines and analyzes a simple variance swap, a relative of the variance swap that in several respects has more desirable properties. First, simple variance swaps are robust: they can be easily priced and hedged even if prices can jump. Second, simple variance swaps supply a more accurate measure of market-implied variance than do variance swaps or the VIX index. Third, simple variance swaps provide a better way to measure and to trade correlation. The paper also explains how to interpret VIX in the presence of jumps.

Suggested Citation

  • Ian Martin, 2011. "Simple Variance Swaps," NBER Working Papers 16884, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16884
    Note: AP

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    Cited by:

    1. Della Corte, Pasquale & Ramadorai, Tarun & Sarno, Lucio, 2016. "Volatility risk premia and exchange rate predictability," Journal of Financial Economics, Elsevier, vol. 120(1), pages 21-40.
    2. Tung-Lam Dao & Trung-Tu Nguyen & Cyril Deremble & Yves Lemp'eri`ere & Jean-Philippe Bouchaud & Marc Potters, 2016. "Tail protection for long investors: Trend convexity at work," Papers 1607.02410,
    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. Stefano De Marco & Caroline Hillairet & Antoine Jacquier, 2013. "Shapes of implied volatility with positive mass at zero," Papers 1310.1020,, revised May 2017.
    5. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    6. Turan G. Bali & Hao Zhou, 2011. "Risk, uncertainty, and expected returns," Finance and Economics Discussion Series 2011-45, Board of Governors of the Federal Reserve System (U.S.).
    7. Schneider, Paul & Wagner, Christian & Zechner, Josef, 2016. "Low risk anomalies?," CFS Working Paper Series 550, Center for Financial Studies (CFS).
    8. Carol Alexander & Johannes Rauch, 2014. "Model-Free Discretisation-Invariant Swaps and S&P 500 Higher-Moment Risk Premia," Papers 1404.1351,, revised Feb 2016.
    9. Bondarenko, Oleg, 2014. "Variance trading and market price of variance risk," Journal of Econometrics, Elsevier, vol. 180(1), pages 81-97.
    10. Carol Alexander & Johannes Rauch, 2016. "Model-Free Discretisation-Invariant Swap Contracts," Papers 1602.00235,, revised Apr 2016.
    11. Warren Bailey & Lin Zheng & Yinggang Zhou, 2012. "What Makes the VIX Tick?," Working Papers 222012, Hong Kong Institute for Monetary Research.
    12. Jeremy Graveline & Irina Zviadadze & Mikhail Chernov, 2012. "Crash Risk in Currency Returns," 2012 Meeting Papers 753, Society for Economic Dynamics.
    13. Ian Martin, 2011. "The Forward Premium Puzzle in a Two-Country World," NBER Working Papers 17564, National Bureau of Economic Research, Inc.
    14. David Hobson & Martin Klimmek, 2011. "Model independent hedging strategies for variance swaps," Papers 1104.4010,, revised May 2011.
    15. repec:oup:qjecon:v:132:y:2017:i:1:p:367-433. is not listed on IDEAS
    16. Ian Martin, 2017. "What is the Expected Return on the Market?," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 367-433.
    17. Philippe Mueller & Andrea Vedolin & Yu-min Yen, 2012. "Bond Variance Risk Premia," FMG Discussion Papers dp699, Financial Markets Group.
    18. David Hobson & Martin Klimmek, 2012. "Model-independent hedging strategies for variance swaps," Finance and Stochastics, Springer, vol. 16(4), pages 611-649, October.
    19. Peter Van Tassel, 2017. "Global Variance Term Premia and Intermediary Risk Appetite," 2017 Meeting Papers 149, Society for Economic Dynamics.
    20. Van Tassel, Peter & Vogt, Erik, 2016. "Global variance term premia and intermediary risk appetite," Staff Reports 789, Federal Reserve Bank of New York.
    21. Gourieroux, C. & Monfort, A., 2015. "Pricing with finite dimensional dependence," Journal of Econometrics, Elsevier, vol. 187(2), pages 408-417.
    22. Chernov, Mikhail & Graveline, Jeremy & Zviadadze, Irina, 2012. "Sources of Risk in Currency Returns," CEPR Discussion Papers 8745, C.E.P.R. Discussion Papers.
    23. Laurent Barras & Aytek Malkhozov, 2015. "Does variance risk have two prices? Evidence from the equity and option markets," BIS Working Papers 521, Bank for International Settlements.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing


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