The note titled,” More than you ever wanted to know about Volatility Swaps”, written by Derman, Demeterfi, Kamal and Zhou, is a fantastic fifty page write up highlighting many aspects of valuing a variance swap and a volatility swap. I love the structure followed in the note. Instead of heading right in to the math behind valuation, the paper gives starts off by giving a superb intuition into the need for variance swap and how does one go about pricing a variance swap with nothing more than common sense.

The article titled, “The Log Contract”, is a 20 year old article. It was first article that made a case for the need for a new instrument to hedge volatility. There is something nice about papers written in the old times. The authors give a healthy intuition about the stuff they are about to explain in the paper, use simple equations that do not require too much of “head banging” and at the end of it, the reader pretty much gets the gist of the paper.

[youtube https://www.youtube.com/watch?v=4OBLAW7oQYo?rel=0]

The paper titled, “A Simple Long Memory Model of Realized Volatility”, is one of the most cited papers in the area of long memory volatility models. One typically assumes that log prices follow an arithmetic random walk. In this kind of set up, it has been shown in the previous research that integrated volatility of Brownian motion can be approximated to any arbitrary precision using the sum of intraday squared returns.

The paper, “Determining the best forecasting models”, is about testing 55 models that belong to the GARCH family. If we have just one model and a straw model, it is easy to show that some statistic on the test sample that the hypothesized model is superior. How do we go about testing a set of competing models? There are many wonderful techniques in the Bayesian world. However this paper is more frequentist in nature.