Extensive research illustrates the jump and discretisation errors that affect the valuation of standard swap contracts. We introduce a vector space of price and return characteristics that allow to define swapswhich can be valued exactly, assuming only that the market is free of arbitrage. Although fair-value swap rates are independent of monitoring frequency, the associated risk premiums are not. A historical analysis based on 16 years of S& P500 data demonstrates the diversity of the risk exposures attainable through trading these swaps, as well as floating-floating swaps that trade differential risk premiums and maturities .
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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Extensive research illustrates the jump and discretisation errors that affect the valuation of standard swap contracts. We introduce a vector space of price and return characteristics that allow to define swapswhich can be valued exactly, assuming only that the market is free of arbitrage. Although
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
R
are independent of monitoring frequency, the associated risk premiums are not. A historical analysis based on 16 years of
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
R
P500 data demonstrates the diversity of the risk exposures attainable through trading these swaps, as well as floating-floating swaps that trade differential risk premiums and maturities
P 500 risk premia associated with these higher-moment characteristics are investigated empirically at the daily, weekly and monthly frequencies