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A Stochastic Hybrid Model for Pricing Forward-Start Variance Swaps


Roslan, Teh Raihana Nazirah (2017) A Stochastic Hybrid Model for Pricing Forward-Start Variance Swaps. In: Proceeding of the 13th IMTGTInternational Conference on Mathematics,Statistics and their Applications (ICSMA2017).

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Abstract

Recently, market players have been exposed to the astounding increase in the trading volume of variance swaps. In this paper, the forward-start nature of a variance swap is king inspected. where hybridizations or equity and interest rate models are used to evaluate the price of discretely-sampled forward-start variance swaps . The Hc~ton~ tmhasticv olatiliry model 1s being extended to incorporate the dynamic5 of the Cox-Tngersoll-Ross (CIR)s tochast~cln teresr rate model. This is essential since previous studies on variance swaps were mainly focusing on instantaneous-start variance swaps without considering the interest rate effects. This hybrid mcdc! pmduccp an cfficicnt scmi-closcd form pricing Formula through the dcvclopmen~ of tijnvnrd characteristic functions. The performance of this formula is investigated via simulations to demonstrate how the formula performs for different sampling times and again the real market scenario. Comparison done with the Monte Car1o simulation which was set as our main reference point reveals that our pricing formula gains almost the same precision in a shorter execution time.

Item Type: Conference or Workshop Item (Paper)
Subjects: Q Science > Q Science (General)
Divisions: College of Arts and Sciences
Depositing User: Mr. Che Hasan Hashim
Date Deposited: 11 Dec 2018 02:33
Last Modified: 11 Dec 2018 02:33
URI: http://repo.uum.edu.my/id/eprint/24927

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