Credit Variance Risk Premiums

Item Type Monograph (Working Paper)

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 index, we find that returns of credit variance swaps are negative and economically large. Shorting variance swaps yields an annualized Sharpe ratio of almost six, eclipsing its counterpart in fixed income or equity markets. The returns remain highly statistically significant when accounting for transaction costs, cannot be explained by established risk-factors, and hold for various investment horizons. We also dissect the overall variance risk premium
into payer and receiver variance risk premiums. We find that exposure to both parts is priced. However, the returns for payer variance, associated with bad economic states, are roughly twice as high in absolute terms.

Authors Ammann, Manuel & Mörke, Mathis
Language English
Keywords Variance risk premium, CDS implied volatility, CDS variance swap
Subjects finance
HSG Classification contribution to scientific community
HSG Profile Area None
Date 4 June 2019
Publisher SoF-HSG
Series Name School of Finance Working Paper Series
Number 2019/08
Number of Pages 48
Depositing User Marion Stadelhofer
Date Deposited 24 Jun 2019 11:47
Last Modified 06 Sep 2021 15:46


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Ammann, Manuel & Mörke, Mathis: Credit Variance Risk Premiums. School of Finance Working Paper Series, 2019, 2019/08.

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