Template-type: ReDIF-Paper 1.0
Author-Name: Chia-Lin Chang
Author-Email: changchialin@nchu.edu.tw
Author-Person: pch286 
Author-Workplace-Name: Department of Applied Economics, Department of Finance, National Chung Hsing University
	Taichung, Taiwan
Author-Name: Juan-Angel Jimenez-Martin
Author-Email: juanangel@ccee.ucm.es
Author-Homepage: https://www.ucm.es/fundamentos-analisis-economico2/jajm
Author-Person: pji27 
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: Michael McAleer
Author-Person: pmc90 
Author-Workplace-Name: Econometrisch Instituut (Econometric Institute), Faculteit der Economische 
	Wetenschappen (Erasmus School of Economics), Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).
Author-Workplace-Name: Division of Marketing and International Business, Nanyang Technological University, Singapore.
Author-Name: Teodosio Pérez-Amaral
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
Title: The Rise and Fall of S&P500 Variance Futures
Abstract: Volatility is an indispensible component of sensible portfolio risk management. The volatility of
	an asset of composite index can be traded by using volatility derivatives, such as volatility and
	variance swaps, options and futures. The most popular volatility index is VIX, which is a key
	measure of market expectations of volatility, and hence is a key barometer of investor sentiment
	and market volatility. Investors interpret the VIX cash index as a “fear” index, and of VIX options
	and VIX futures as derivatives of the “fear” index. VIX is based on S&P500 call and put options
	over a wide range of strike prices, and hence is not model based. Speculators can trade on
	volatility risk with VIX derivatives, with views on whether volatility will increase or decrease in
	the future, while hedgers can use volatility derivatives to avoid exposure to volatility risk. VIX
	and its options and futures derivatives has been widely analysed in recent years. An alternative
	volatility derivative to VIX is the S&P500 variance futures, which is an expectation of the
	variance of the S&P500 cash index. Variance futures are futures contracts written on realized
	variance, or standardized variance swaps. The S&P500 variance futures are not model based, so
	the assumptions underlying the index do not seem to have been clearly understood. As these two
	variance futures are thinly traded, their returns are not easy to model accurately using a variety of
	risk models. This paper analyses the S&P500 3-month variance futures before, during and after
	the GFC, as well as for the full data period, for each of three alternative conditional volatility
	models and three densities, in order to determine whether exposure to risk can be incorporated into
	a financial portfolio without taking positions on the S&P500 index itself.
Classification-JEL: C22, G32, G01.
Keywords: Risk management, financial derivatives, futures, options, swaps, 3-month variance futures, 12-month 
	variance futures, risk exposure, volatility.
Note: The authors are most grateful for the helpful comments and suggestions of participants at the
	International Conference on Risk Modelling and Management, Madrid, Spain, June 2011. The
	first author wishes to acknowledge the financial support of the National Science Council, Taiwan,
	the second and fourth authors acknowledge the Ministerio de Ciencia y Tecnología and
	Comunidad de Madrid, Spain, and the third author is most grateful for the financial support of the
	Australian Research Council, Japan Society for the Promotion of Science, and the National
	Science Council, Taiwan.
Length: 40 pages 
Creation-Date: 2011 
Number: 2011-35
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae1135.txt
File-URL: https://eprints.ucm.es/id/eprint/13910/1/1135.pdf
File-Format: Application/pdf
File-Function: Revised November 2011
Handle: RePEc:ucm:doicae:1135