Analytically pricing variance and volatility swaps with stochastic volatility, stochastic equilibrium level and regime switching

• Published in: Expert systems with applications Vol. 217; p. 119592
• Main Authors: Lin, Sha, He, Xin-Jiang
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.05.2023
• Subjects: Analytical solution; Regime switching; Stochastic volatility; Two-factor stochastic equilibrium level; Variance/volatility swaps; Stochastic volatility; Variance/volatility swaps; Analytical solution; Regime switching; Two-factor stochastic equilibrium level

This paper proposes a new model with a two-factor stochastic equilibrium volatility level that can be used to price variance and volatility swaps with nonlinear payoff. The adopted model uses the CIR process as the volatility process with the constant equilibrium level replaced with a stochastic one...