Credit variance risk premiums

Abstract

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.

Work‐from‐home and the risk of securities misconduct

“…The global Covid pandemic increased market risk (Ammann & Moerke, 2022; Battauz et al, 2021; Cai et al, 2022; Chiu et al, 2023; Kind et al, 2022), reconfigured how and where employees performed their work (Gregg et al, 2022), and did this at an extreme intensity (Adams‐Prassl et al, 2022). Although work‐from‐home is now seen as a permanent part of business life (Barrero et al, 2021), an online workforce raises issues that do not yet have solutions (Nyberg et al, 2021).…”