Abstract
Pricing variance swaps under stochastic volatility has been an important subject pursued recently. Various approaches have been proposed, mainly due to the substantially increased trading activities of volatility-related derivatives in the past few years. In this note, the authors develop analytical method for pricing variance swaps under stochastic volatility with an Ornstein-Uhlenbeck (OU) process. By using Fourier transform algorithm, a closed-form solution for pricing variance swaps with stochastic volatility is obtained, and to give a comparison of fair strike value based on the discrete model, continuous model, and the Monte Carlo simulations.
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This paper was supported by the National Social Science Fund of China under Grant No. 14ATJ005, Anhui Provincial Natural Science Foundation under Grant Nos. 1308085MF93 and 1408085MKL84, and the National Natural Science Foundations of China under Grant No. 11401556.
This paper was recommended for publication by Editor ZOU Guohua.
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Jia, Z., Bi, X. & Zhang, S. Pricing variance swaps under stochastic volatility with an Ornstein-Uhlenbeck process. J Syst Sci Complex 28, 1412–1425 (2015). https://doi.org/10.1007/s11424-015-3165-6
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DOI: https://doi.org/10.1007/s11424-015-3165-6