Is the Variance Swap Rate Affine in the Spot Variance? Evidence From S&P500 Data

We empirically investigate the functional link between the variance swap rate and the spot variance. Using S&P500 data over the period 2006-2018, we find overwhelming empirical evidence supporting the affine link analytically found by Kallsen et al. (2011) in the context of exponentially affine stochastic volatility models. Tests on yearly subsamples suggest that exponentially mean-reverting variance models provide a good fit during periods of extreme volatility, while polynomial models, introduced in Cuchiero (2011), are suited for years characterized by more frequent price jumps.

Keywords: Variance swap, Spot variance, Exponentially affine models, Exponentially mean-reverting variance models, Polynomial models

JEL Classification: C2, C12, C51, G12, G13

Suggested Citation: Suggested Citation

Mancino, Maria Elvira and Scotti, Simone and Toscano, Giacomo, Is the Variance Swap Rate Affine in the Spot Variance? Evidence From S&P500 Data (April 5, 2020). Available at SSRN: https://ssrn.com/abstract=3571429 or http://dx.doi.org/10.2139/ssrn.3571429