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| Author: | Hafner, R. Wallmeier, M. |
| Title: | Volatility as an asset class: European evidence |
| Journal: | European Journal of Finance
2007 : OCT/DEC, VOL. 13:7-8, p. 621-644 |
| Index terms: | financial markets volatility risk premium Europe |
| Language: | eng |
| Abstract: | It is known that volatility movements are negatively correlated with stock index returns. This paper examines the risk-return tradeoff of variance /(hereafter as: var.) swaps on the Deutscher Aktienindex and Euro STOXX 50 index from 1995 to 2004. Using quotes from two large investment banks over two months, the synthetic values are validated to be close to OTC market prices. It is found that var. swap returns exhibit an option-like profile compared to returns of the underlying index. As in the U.S., the average returns of selling var. swaps are found to be strongly positive and too large to be compatible with standard equilibrium models. The magnitude of the estimated risk premium is related to variance uncertainty and past index returns. |
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