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Riding the Swaption Curve

61 Pages Posted: 21 Feb 2012 Last revised: 25 Jan 2016

Johan G. Duyvesteyn

Robeco Asset Management

Gerben J. de Zwart

APG Asset Management

Date Written: March 20, 2015

Abstract

We conduct an empirical analysis of the term structure in the volatility risk premium in the fixed income market by constructing long-short combinations of two at-the-money straddles for the four major swaption markets (USD, JPY, EUR and GBP). Our findings are consistent with a concave, upward-sloping maturity structure for all markets, with the largest negative premium for the shortest term maturity. The fact that both delta-vega and delta-gamma neutral straddle combinations earn positive returns that seem uncorrelated suggests that the term structure is affected by both jump risk and volatility risk. The results seem robust for macroeconomic announcements and the specific model choice to estimate the risk exposures for hedging.

Keywords: Volatility risk premium, Term structure, Swaptions, Straddles, Bonds, Interest rate derivatives

JEL Classification: G120, G130, G140

Suggested Citation

Duyvesteyn, Johan G. and de Zwart, Gerben J., Riding the Swaption Curve (March 20, 2015). Journal of Banking and Finance, Vol. 59, 2015. Available at SSRN: https://ssrn.com/abstract=2008841 or http://dx.doi.org/10.2139/ssrn.2008841

Johan Duyvesteyn (Contact Author)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Gerben De Zwart

APG Asset Management ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands
+31-20-6048182 (Phone)

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