publication . Article . 2016

Arithmetic variance swaps

Leontsinis, Stamatis; Alexander, Carol;
Open Access
  • Published: 08 Sep 2016 Journal: Quantitative Finance, volume 17, pages 551-569 (issn: 1469-7688, eissn: 1469-7696, Copyright policy)
  • Publisher: Informa UK Limited
  • Country: United Kingdom
Abstract
Biases in standard variance swap rates can induce substantial deviations below market rates. Defining realised variance as the sum of squared price (not log-price) changes yields an `arithmetic' variance swap with no such biases. Its fair value has advantages over the standard variance swap rate: no discrete-monitoring or jump biases; and the same value applies for any monitoring frequency, even irregular monitoring and to any underlying, including those taking zero or negative values. We derive the fair-value for the arithmetic variance swap and compare with the standard variance swap rate by: analysing errors introduced by interpolation and integration techniq...
Subjects
free text keywords: Statistics, Realized variance, Moment (mathematics), Price variance, Variance risk premium, Financial economics, Correlation swap, Law of total variance, Conditional variance swap, Economics, Econometrics, Arithmetic, Variance swap, H
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publication . Article . 2016

Arithmetic variance swaps

Leontsinis, Stamatis; Alexander, Carol;