Credit Variance Risk Premiums

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.

• Publication year

  2019

• Venue

  Social Science Research Network

• Publication date

  2019-06-04

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.2139/SSRN.3409082
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

• Is the credit spread puzzle a myth?

  2020cited by this paper
• The term structure of equity and variance risk premia

  2020cited by this paper
• Exploring Mispricing in the Term Structure of CDS Spreads

  2019cited by this paper
• Taming the Factor Zoo: A Test of New Factors

  2019cited by this paper
• Variance-of-variance risk premium

  2018influential reference
• Time-Varying Systemic Risk: Evidence From a Dynamic Copula Model of CDS Spreads

  2018cited by this paper
• The credit default swap market: what a difference a decade makes

  2018influential reference
• Intermediary Asset Pricing: New Evidence from Many Asset Classes

  2017cited by this paper
• Choosing Factors

  2017cited by this paper
• Risk Premia and the VIX Term Structure

  2017influential reference
• The Price of Fixed Income Market Volatility

  2016cited by this paper
• Quadratic Variance Swap Models

  2016influential reference
• Market Structure and Transaction Costs of Index CDSs

  2016cited by this paper
• Shedding Light on Dark Markets: First Insights from the New Eu-Wide OTC Derivatives Dataset

  2016cited by this paper
• The Price of Variance Risk

  2015cited by this paper
• Are Credit Default Swaps a Sideshow? Evidence That Information Flows from Equity to CDS Markets

  2015cited by this paper
• Rate fears gauges and the dynamics of fixed income and equity volatilities

  2015cited by this paper
• Credit Default Swaps: A Survey

  2014cited by this paper
• Variance Risk Premia in Commodity Markets

  2014cited by this paper
• Variance Trading and Market Price of Variance Risk

  2014influential reference
• A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix

  2014cited by this paper
• The Swaption Cube

  2014influential reference
• The VIX, the Variance Premium and Stock Market Volatility

  2013cited by this paper
• Variance Risk Premiums in Foreign Exchange Markets

  2013influential reference
• Credit Risk and Disaster Risk

  2013cited by this paper
• The Term Structure of Variance Swaps and Risk Premia ∗

  2013influential reference
• Realized Skewness

  2012cited by this paper
• Bond Variance Risk Premia

  2012cited by this paper
• Options on Credit Default Swaps and Credit Default Indexes

  2012influential reference
• Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance

  2012cited by this paper
• The Determinants of Credit Default Swap Spread of Korea

  2011influential reference
• Robust econometric inference for stock return predictability

  2011cited by this paper
• NO‐ARMAGEDDON MEASURE FOR ARBITRAGE‐FREE PRICING OF INDEX OPTIONS IN A CREDIT CRISIS

  2010cited by this paper
• The Term Structure of Variance Swap Rates and Optimal Variance Swap Investments

  2010cited by this paper
• Understanding the VIX

  2009cited by this paper
• The Price of Correlation Risk: Evidence from Equity Options

  2009cited by this paper
• Variance Risk Premiums

  2009cited by this paper
• Option Strategies: Good Deals and Margin Calls

  2009cited by this paper
• Dissecting the Market Pricing of Return Volatility

  2009cited by this paper
• The Co‐movement of Credit Default Swap, Bond and Stock Markets: an Empirical Analysis

  2009cited by this paper
• The Determinants of Credit Default Swap Premia

  2009influential reference
• The Information Content of Option-Implied Volatility for Credit Default Swap Valuation

  2009cited by this paper
• Default and Recovery Implicit in the Term Structure of Sovereign CDS Spreads

  2008cited by this paper
• Individual Stock-Option Prices and Credit Spreads

  2008cited by this paper
• How Sovereign is Sovereign Credit Risk

  2007cited by this paper
• Back to the future: Futures margins in a future credit default swap index futures market

  2007cited by this paper
• A Tale of Two Indices

  2006influential reference
• Risk and Return in Fixed Income Arbitrage: Nickels in front of a Steamroller?

  2006cited by this paper
• CreditGrades and the iTraxx CDS Index Market

  2006cited by this paper
• How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk ? 1

  2003cited by this paper
• Equity Volatility and Corporate Bond Yields

  2002cited by this paper
• The Statistics of Sharpe Ratios

  2002cited by this paper
• Expected Option Returns

  2001cited by this paper
• Optimal positioning in derivative securities

  2001cited by this paper
• The Determinants of Credit Spread Changes

  2001cited by this paper
• Option Pricing, Interest Rates and Risk Management: Towards a Theory of Volatility Trading

  2001cited by this paper
• Stock Return Characteristics, Skew Laws, and the Di erential Pricing of Individual Equity Options

  2000cited by this paper
• Option Prices, Implied Price Processes, and Stochastic Volatility

  2000cited by this paper
• Spanning and Derivative-Security Valuation

  2000cited by this paper
• More than You ever Wanted to Know about Volatility Swaps

  1999cited by this paper
• The Log Contract

  1994cited by this paper
• Common risk factors in the returns on stocks and bonds

  1993influential reference
• The Persistence of Mutual Fund Performance

  1992cited by this paper
• Efficient Analytic Approximation of American Option Values

  1987cited by this paper
• On the Pricing of Corporate Debt: The Risk Structure of Interest Rates

  1974influential reference
• Large Sample Properties of Generalized Method of Moments Estimators

  year unknowncited by this paper

• Predictive power of oil prices on CDS spread dynamics of oil-producing countries

  2025cites this paper
• Asymmetric Shocks and Pension Fund Volatility: A GARCH Approach with Macroeconomic Predictors to an Unexplored Emerging Market

  2025cites this paper
• Predicting Realized Variance Out of Sample: Can Anything Beat The Benchmark?

  2025cites this paper
• Market Effects of Central Bank Credit Markets Support Programs in Europea

  2025cites this paper
• Volatility feedback and dealership position: Evidence from the CDS Index, Corporate Bonds, and Government Bonds

  2024cites this paper
• Work‐from‐home and the risk of securities misconduct

  2023cites this paper