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27 2015 12:30 - 13:30
Via Roentgen 1, II floor, room 2 e4 sr 03

Divergence, Fear, and the Price of Uncertainty


Fabio Trojani, USI

BROWN BAG SEMINAR


Abstract:

We introduce a new class of swap trading strategies in incomplete markets, which disaggregate the tradeable compensation for time-varying nonlinear risks in
aggregate market returns. While the price of Hellinger variance, a tradeable put-call symmetric measure of variance, has a leading contribution to the VIX volatility index,
the higher-order contribution to the VIX is comprehensively captured by the price of tradeable skewness and kurtosis. Risk premia for trading Hellinger variance, skewness
and kurtosis do not vanish after transaction costs and are all linked to non-tradeable indices of fear. Skew swaps appear as the most appropriate vehicles for trading fear and
disaster risk, as they are best spanned by non-tradeable indices of fear and consistently price market skewness benchmarked to put-call symmetry.




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