Credit Variance Risk Premiums
Journal
European Financial Management
Type
journal article
Date Issued
2023-09
Author(s)
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 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.
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.
Language
English
Keywords
Variance risk premium
CDS implied volatility
CDS variance swap
HSG Classification
contribution to scientific community
HSG Profile Area
None
Refereed
Yes
Publisher
S
Volume
29
Number
4
Start page
1304
End page
1335
Official URL
Subject(s)
Eprints ID
257210