Affine Variance Swap Curve Models

13 Pages Posted: 3 Apr 2012 Last revised: 6 Jul 2012

See all articles by Damir Filipović

Damir Filipović

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: July 1, 2012

Abstract

This paper provides a brief overview of the stochastic modeling of variance swap curves. Focus is on affine factor models. We propose a novel drift parametrization which assures that the components of the state process can be matched with any pre-speci fied points on the variance swap curve. This should facilitate the empirical estimation for such stochastic models. Moreover, sufficient and yet flexible conditions that guarantee positivity of the rates are readily available. We finally discuss the relation and differences to affine yield-factor models introduced by Duffie and Kan. It turns out that, in contrast to variance swap models, their yield factor representation requires imposing constraints on systems of nonlinear equations that are often not solvable in closed form.

Keywords: Affine variance swap rate factor models, Variance swaps, VIX

JEL Classification: G13, C51

Suggested Citation

Filipovic, Damir, Affine Variance Swap Curve Models (July 1, 2012). Swiss Finance Institute Research Paper No. 12-14. Available at SSRN: https://ssrn.com/abstract=2033241 or http://dx.doi.org/10.2139/ssrn.2033241

Damir Filipovic (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

HOME PAGE: http://people.epfl.ch/damir.filipovic

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