Journal ArticleDOI
The effect of jumps and discrete sampling on volatility and variance swaps
Mark Broadie,Ashish Jain +1 more
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In this article, the effect of discrete sampling and asset price jumps on fair variance and volatility swap strikes is investigated in different models of the underlying evolution of the asset price: the Black-Scholes model, the Heston stochastic volatility model, and the Merton jump-diffusion model.Abstract:
We investigate the effect of discrete sampling and asset price jumps on fair variance and volatility swap strikes. Fair discrete volatility strikes and fair discrete variance strikes are derived in different models of the underlying evolution of the asset price: the Black-Scholes model, the Heston stochastic volatility model, the Merton jump-diffusion model and the Bates and Scott stochastic volatility and jump model. We determine fair discrete and continuous variance strikes analytically and fair discrete and continuous volatility strikes using simulation and variance reduction techniques and numerical integration techniques in all models. Numerical results show that the well-known convexity correction formula may not provide a good approximation of fair volatility strikes in models with jumps in the underlying asset. For realistic contract specifications and model parameters, we find that the effect of discrete sampling is typically small while the effect of jumps can be significant.read more
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ReportDOI
Simple Variance Swaps
TL;DR: In this paper, the authors define and analyze a simple variance swap, a relative of the variance swap that in several respects has more desirable properties: simple variance swaps are robust: they can be easily priced and hedged even if prices can jump.
Journal ArticleDOI
Variance swaps on time-changed Lévy processes
Peter Carr,Roger Lee,Liuren Wu +2 more
TL;DR: It is proved that a multiple of a log contract prices a variance swap, under arbitrary exponential Lévy dynamics, stochastically time-changed by an arbitrary continuous clock having arbitrary correlation with the driving LÉvy process, subject to integrability conditions.
Journal ArticleDOI
A Closed-Form Exact Solution for Pricing Variance Swaps With Stochastic Volatility
Song-Ping Zhu,Guanghua Lian +1 more
TL;DR: In this article, a closed-form exact solution for the PDE system based on the Heston's two-factor stochastic volatility model embedded in the framework proposed by Little and Pant is presented.
Journal ArticleDOI
The Term Structure of Variance Swaps and Risk Premia
TL;DR: In this article, the term structure of variance swaps, equity and variance risk premia is studied and a model-free analysis reveals that investors' willingness to ensure against volatility risk increases after a market drop.
Posted Content
An Analytical Formula for VIX Futures and its Applications
Song-Ping Zhu,Guanghua Lian +1 more
TL;DR: In this article, the authors present a closed-form exact solution for the pricing of VIX futures in a stochastic volatility model with simultaneous jumps in both the asset price and volatility processes.
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Journal ArticleDOI
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