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Abstract
Barnea and Hogan use synthetically created variance swaps onVIX futures to quantify the variance risk premium inVIX options. The results of this methodology suggest that the average premium is -3.26%,meaning that the realized variance onVIX futures is, on average, less than the variance implied by the swap rate. This premium does not vary with time or the level of the swap rate as much as premiums in other asset classes. A negative risk premium implies that VIX option strategies that are net credit should be profitable.
TOPICS: Exchanges/markets/clearinghouses, interest-rate and currency swaps, statistical methods
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