The Swaption Cube

Review of Financial Studies, vol. 27, no. 8, p. 2307-2353, 2014

87 Pages Posted: 28 Oct 2010 Last revised: 10 Feb 2016

See all articles by Anders B. Trolle

Anders B. Trolle

Copenhagen Business School

Eduardo S. Schwartz

University of California, Los Angeles (UCLA) - Finance Area; Simon Fraser University (SFU); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 28, 2013

Abstract

We infer conditional swap rate moments model independently from swaption cubes. Conditional volatility and skewness exhibit systematic variation across swap maturities and option expiries (conditional kurtosis less so), with conditional skewness sometimes changing sign. Conditional skewness displays some relation to the level and volatility of swap rates but is most consistently related to the conditional correlation between swap rates and swap rate variances. From realized excess returns on synthetic variance and skewness swap contracts, we infer that variance and (to a lesser extent) skewness risk premia are negative and time varying. For the most part, results hold true in both the USD and EUR markets and in both precrisis and crisis subsamples. We design and estimate a dynamic term structure model that captures much of the dynamics of conditional swap rate moments.

JEL Classification: E43, G12, G13

Suggested Citation

Trolle, Anders B. and Schwartz, Eduardo S. and Schwartz, Eduardo S., The Swaption Cube (November 28, 2013). Review of Financial Studies, vol. 27, no. 8, p. 2307-2353, 2014, Available at SSRN: https://ssrn.com/abstract=1698910 or http://dx.doi.org/10.2139/ssrn.1698910

Anders B. Trolle (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Eduardo S. Schwartz

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1953 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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