Fear Trading

74 Pages Posted: 30 Jan 2012 Last revised: 3 Feb 2015

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Fabio Trojani

University of Geneva; Swiss Finance Institute

Date Written: January 15, 2015


We introduce a new class of swap trading strategies in incomplete markets, which disaggregate the tradeable compensation for time-varying nonlinear risks in aggregate market returns. While the price of Hellinger variance, a tradeable put-call symmetric measure of variance, has a leading contribution to the VIX volatility index, the higher-order contribution to the VIX is comprehensively captured by the price of tradeable skewness and kurtosis. Risk premia for trading Hellinger variance, skewness and kurtosis do not vanish after transaction costs and are all linked to non-tradeable indices of fear. Skew swaps appear as the most appropriate vehicles for trading fear and disaster risk, as they are best spanned by non-tradeable indices of fear and consistently price market skewness benchmarked to put-call symmetry.

Keywords: Skew, Variance Swap, Realized Variance, Trading Strategy, Disaster, Robust, Jumps

Suggested Citation

Schneider, Paul and Trojani, Fabio, Fear Trading (January 15, 2015). Swiss Finance Institute Research Paper No. 15-03. Available at SSRN: https://ssrn.com/abstract=1994454 or http://dx.doi.org/10.2139/ssrn.1994454

Paul Georg Schneider (Contact Author)

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Fabio Trojani

University of Geneva ( email )


Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900

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