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arXiv · 1404.1351

Model-Free Discretisation-Invariant Swaps and S&P 500 Higher-Moment Risk Premia

Carol Alexander·Johannes Rauch
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Abstract

We derive a general multivariate theory for realised characteristics of `model-free discretisation-invariant swaps', so-called because the standard no-arbitrage assumption of martingale forward prices is sufficient to derive fair-value swap rates for such characteristics which have no jump or discretisation errors. This theory underpins specific examples for swaps based on higher moments of a single log return distribution where exact replication is possible via option-implied `fundamental contracts' like the log contact. The common factors determining the S&P 500 risk premia associated with these higher-moment characteristics are investigated empirically at the daily, weekly and monthly frequencies.

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BibTeXRIS

Carol Alexander, Johannes Rauch. 2016-02-04. Model-Free Discretisation-Invariant Swaps and S&P 500 Higher-Moment Risk Premia. https://doi.org/10.2139/ssrn.2420051

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