Quadratic variance swap models

Damir Filipović; Elise Gourier; Loriano Mancini

We introduce a novel class of term structure models for variance swaps. The multivariate state process is characterized by a quadratic diffusion function. The variance swap curve is quadratic in the state variable and available in closed form, greatly facilitating empirical analysis. Various goodness-of-fit tests show that quadratic models fit variance swaps on the S&P 500 remarkably well, and outperform affine models. We solve a dynamic optimal portfolio problem in variance swaps, index option, stock index and bond. An empirical analysis uncovers robust features of the optimal investment strategy

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Year of publication:	2013
Authors:	Filipović, Damir ; Gourier, Elise ; Mancini, Loriano
Publisher:	Genève : Swiss Finance Inst.
Subject:	Swap \| Varianzanalyse \| Analysis of variance \| Portfolio-Management \| Portfolio selection \| Zinsstruktur \| Yield curve \| Schätzung \| Estimation \| USA \| United States

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