Credit Variance Risk Premiums

50 Pages Posted: 24 Jun 2019 Last revised: 12 Sep 2022

See all articles by Manuel Ammann

Manuel Ammann

University of St. Gallen - School of Finance

Mathis Moerke

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Date Written: July 1, 2021

Abstract

This paper studies variance risk premiums in the credit market using a novel data set of swaptions quotes on the CDX North America Investment Grade and High Yield indices. The returns of credit variance swaps are negative and economically large, irrespective of the credit rating class. They are robust to transaction costs and cannot be explained by established risk factors and structural model variables. We also dissect the overall variance risk premium into receiver and payer variance risk premiums. We show that credit variance risk premiums are mainly driven by the payer corridor, which is associated with worsening macroeconomic conditions.

Keywords: Variance risk premium, CDS implied volatility, CDS variance swap

JEL Classification: G12

Suggested Citation

Ammann, Manuel and Moerke, Mathis, Credit Variance Risk Premiums (July 1, 2021). European Financial Management, Forthcoming, University of St.Gallen, School of Finance Research Paper No. 2019/08 , Available at SSRN: https://ssrn.com/abstract=3409082 or http://dx.doi.org/10.2139/ssrn.3409082

Manuel Ammann (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Mathis Moerke

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, CH-9000
Switzerland

HOME PAGE: http://www.mathismoerke.com

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St. Gallen, 9000
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
441
Abstract Views
1,974
rank
94,459
PlumX Metrics