Thursday 9th February 2012 – 12:30 to 13:30
Speaker: Ian Martin (Stanford)
The events of 2008-9 disrupted volatility derivatives markets and caused the single-name variance swap market to dry up completely; it has never recovered. This paper introduces the “simple variance swap”, a realtive of the variance sway with more desirable properties. Simple variance swaps are robust: they can be priced and hedged even if the underlying asset’s price can jump. I construct SVIX, an index based on simple variance swaps that measures market volatility. SVIX is consistently lower than VIX in the time series, which rules out the possibility that the market return and stochastic discount factor are conditionally lognormal. The SVIX series implies a lower bound on the forward-looking equity premium that peaked ar 55% at the height of the credit crisis.
Part of the OMI Seminar Series