Abstract.
Models which hypothesize that returns are pure jump processes with independent increments have been shown to be capable of capturing the observed variation of market prices of vanilla stock options across strike and maturity. In this paper, these models are employed to derive in closed form the prices of derivatives written on future realized quadratic variation. Alternative work on pricing derivatives on quadratic variation has alternatively assumed that the underlying returns process is continuous over time. We compare the model values of derivatives on quadratic variation for the two types of models and find substantial differences.
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Mathematics Subject Classification:
60G18, 60G51, 60G52
JEL Classification:
G10, G12, G13
We thank the anonymous referee for constructive comments on the paper and particularly with respect to the hierarchy of self decomposability.
Manuscript received: November 2003; final version received: January 2005
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Carr, P., Geman, H., Madan, D.B. et al. Pricing options on realized variance. Finance Stochast. 9, 453–475 (2005). https://doi.org/10.1007/s00780-005-0155-x
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DOI: https://doi.org/10.1007/s00780-005-0155-x