Is the Variance Swap Rate Affine in the Spot Variance? Evidence from S&P500 Data

Abstract

ABSTRACT We empirically investigate the functional link between the variance swap rate and the spot variance. Using S&P500 data over the period 2006–2018, we find overwhelming empirical evidence supporting the affine link implied by exponential affine stochastic volatility models. Tests on yearly subsamples suggest that exponential mean-reverting variance models provide a good fit during periods of extreme volatility, while polynomial modelsare suited for years characterized by more frequent price jumps.