Forecasting the Term Structure of Variance Swaps

Recently, Diebold and Li (2003) obtained good forecasting results foryield curves in a reparametrized Nelson-Siegel framework. We analyze similarmodeling approaches for price curves of variance swaps that serve nowadaysas hedging instruments for options on realized variance. We consider the popular Heston model, reparametrize its variance swap price formula and model the entire variance swap curves by two exponential factors whose loadings evolve dynamically on a weekly basis. Generalizing this approach we consider a reparametrization of the three-dimensional Nelson-Siegel factor model. We show that these factors can be interpreted as level, slope and curvature and how they can be estimated directly from characteristic points of the curves...

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Authors:	Detlefsen, Kai ; Härdle, Wolfgang
Institutions:	Sonderforschungsbereich Ökonomisches Risiko <Berlin>
Subject:	Varianz \| variance principle \| Semiparametrisches Modell \| Zinsstruktur \| Term structure model

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Extent:	572416 bytes 32 p. application/pdf
Series:	Humboldt-Universität zu Berlin - Sonderforschungsbereich 649 - Discussion Papers SFB 649 Discussion Paper ; 2006-052
Type of publication:	Book / Working Paper
Language:	English
Classification:	C5 - Econometric Modeling ; D4 - Market Structure and Pricing ; G1 - General Financial Markets ; Corporate finance and investment policy. Other aspects ; Individual Working Papers, Preprints ; No country specification
Source:	USB Cologne (business full texts)