TY  - JOUR
AU  - Martin,Ian
TI  - Simple Variance Swaps
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16884
PY  - 2011
Y2  - March 2011
UR  - http://www.nber.org/papers/w16884
L1  - http://www.nber.org/papers/w16884.pdf
N1  - Author contact info:
Ian Martin
Graduate School of Business
Stanford University
Stanford, CA 94305
Tel: 650/721-1297
E-Mail: ian.martin@gsb.stanford.edu
AB  - The large asset price jumps that took place during 2008 and 2009 disrupted volatility derivatives markets and caused the single-name variance swap market to dry up completely.  This paper defines and analyzes a simple variance swap, a relative of the variance swap that in several respects has more desirable properties.  First, simple variance swaps are robust: they can be easily priced and hedged even if prices can jump.  Second, simple variance swaps supply a more accurate measure of market-implied variance than do variance swaps or the VIX index.  Third, simple variance swaps provide a better way to measure and to trade correlation.  The paper also explains how to interpret VIX in the presence of jumps.
ER  -