A simplified analytical approach for pricing discretely-sampled variance swaps with stochastic volatility

Pricing variance swaps under stochastic volatility with discretely-sampled realized variance has been a hot subject pursued recently; quite a few papers have already been published (Zhu and Lian (2009, 2011, [11,4]); Swishchuk and Li (2011) [5]). In this paper, we present a simplified approach to pr...

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Bibliographic Details
Published inApplied mathematics letters Vol. 25; no. 11; pp. 1644 - 1650
Main Authors Rujivan, Sanae, Zhu, Song-Ping
Format Journal Article
LanguageEnglish
Published Elsevier Ltd 01.11.2012
Subjects
Closed-form exact solution
Explicit formula
Heston model
Stochastic volatility
Variance swaps
Stochastic volatility
Explicit formula
Variance swaps
Heston model
Closed-form exact solution
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Summary:Pricing variance swaps under stochastic volatility with discretely-sampled realized variance has been a hot subject pursued recently; quite a few papers have already been published (Zhu and Lian (2009, 2011, [11,4]); Swishchuk and Li (2011) [5]). In this paper, we present a simplified approach to price discretely-sampled variance swaps. Compared with the approach presented by Zhu and Lian (2011) [4], an important feature of our approach is that there is no need for the introduction of a new state variable and the utilization of the generalized Fourier transform. This has significantly simplified the solution procedure and will thus enable researchers to view this type of problems from a different angle.
ISSN:0893-9659
1873-5452
DOI:10.1016/j.aml.2012.01.029