Pricing Variance Swaps Under Stochastic Volatility with an Ornstein-Uhlenbeck Process

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...

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Bibliographic Details
Published inJournal of systems science and complexity Vol. 28; no. 6; pp. 1412 - 1425
Main Authors Jia, Zhaoli, Bi, Xiuchun, Zhang, Shuguang
Format Journal Article
LanguageEnglish
Published Beijing Academy of Mathematics and Systems Science, Chinese Academy of Sciences 01.12.2015
Subjects
Complex Systems
Control
Mathematics
Mathematics and Statistics
Mathematics of Computing
Operations Research/Decision Theory
Ornstein-Uhlenbeck过程
Statistics
Systems Theory
互换
傅立叶变换算法
定价
方差
波动分析法
蒙特卡洛模拟
随机波动率
Closed-form solution
Ornstein-Uhlenbeck process
variance swaps
stochastic volatility
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Summary: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.
Bibliography: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.
11-4543/O1
Closed-form solution,Ornstein-Uhlenbeck process,stochastic volatility,variance swaps
ISSN:1009-6124
1559-7067
DOI:10.1007/s11424-015-3165-6