| Name: | Description: | Size: | Format: | |
|---|---|---|---|---|
| 612.83 KB | Adobe PDF |
Authors
Advisor(s)
Abstract(s)
We propose a simple and e cient way of forecasting the term structure of swap
rates and we demonstrate how an investor might bene t from (i) the variance swap
as an asset; and (ii) from the implied information present on the swap rate. We show
that the Nelson-Siegel model is enough to capture the dynamics of the swap rate term-
structure and that the three factors may be interpreted as the level, slope and curvature
of the curve. Further, we show that the expected change in the swap rate predicts the
one-month forward market return with an OOS R2 of 2.9%. An investment strategy
in both the variance swap and the underlying yields out-of-sample annualized Sharpe
ratios around 1.89 which are robust across several di erent portfolios.