A variance swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the magnitude of movement, i.e. volatility, of some underlying product, like an exchange rate, interest rate, or stock index.
What is ‘Variance Swap’
A type of volatility swap where the payout is linear to variance rather than volatility. Therefore, the payout will rise at a higher rate than volatility
Explaining ‘Variance Swap’
Variance is the square of standard deviation. Because of this, a variance swaps’ payout will be larger than that of a volatility swap, as these products are based upon variance rather than standard deviation.
- The term structure of variance swap rates and optimal variance swap investments – www.jstor.org [PDF]
- The effect of jumps and discrete sampling on volatility and variance swaps – www.worldscientific.com [PDF]
- Prices and asymptotics for discrete variance swaps – www.tandfonline.com [PDF]
- Variance risk premiums – academic.oup.com [PDF]
- The term structure of variance swaps and risk premia – papers.ssrn.com [PDF]
- How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns – www.sciencedirect.com [PDF]
- Testing for jumps when asset prices are observed with noise–a “swap variance” approach – www.sciencedirect.com [PDF]
- GARCH and volatility swaps – www.tandfonline.com [PDF]