Template-type: ReDIF-Paper 1.0
Author-Name: Belén Nieto 
Author-Email: belen.nieto@ua.es
Author-Homepage: https://web.ua.es/es/researchgroupmffe/investigadores/nietodomenech.html
Author-Workplace-Name: Departamento de Economía financiera y Contabilidad, Universidad de Alicante
Author-Name: Alfonso Novales Cinca
Author-Email: anovales@ccee.ucm.es
Author-Person: pno7 
Author-Homepage: https://www.ucm.es/fundamentos-analisis-economico2/novales-cinca,-alfonso
Author-Workplace-Name: Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de 
	Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid
Author-Workplace-Homepage: https://www.ucm.es/fundamentos-analisis-economico2
Author-Name: Gonzalo Rubio
Author-Email: gonzalo.rubio@uch.ceu.es
Author-Workplace-Name: Universidad CEU Cardenal Herrera
Title: Why do variance swaps exist?
Abstract: This paper studies the determinants of the variance risk premium and concludes on the
	hedging possibilities offered by variance swaps. We start by showing that the variance
	risk premium responds to changes in higher order moments of the distribution of market
	returns. But the uncertainty that determines the variance risk premium –the fear by
	investors to deviations from Normality in returns- is also strongly related to a variety of
	risks: risk of default, employment growth risk, consumption growth risk, stock market
	risk and market illiquidity risk. Therefore, the variance risk premium could be
	interpreted as reflecting the market willingness to pay for hedging against financial and
	macroeconomic sources of risk. We provide additional evidence in support of that view.
Classification-JEL: C13, C14, G10, G12
Keywords: Variance risk premium, Non-normality, Economic risks, Hedging
Length: 33 pages 
Creation-Date: 2011 
Number: 2011-06 
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae1106.txt
File-URL: https://eprints.ucm.es/id/eprint/12520/1/1106.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:1106