Roslan, Teh Raihana Nazirah and Zhang, Wenjun and Cao, Jiling (2014) Valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates. In: 8th International Conference on Applied Mathematics, Sumulation and Modeling Recent Advances in Applied Mathematics, Modeling and Simulation, 11/22/2014 - 11/24/2014, Florence, Italy.

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Abstract

In this paper, we evaluate the price of discretely-sampled variance swaps using a equity-interest rate hybrid model. Our modeling framework extends the Heston stochastic volatility model by including the Cox-Ingersoll-Ross stochastic interest rates and imposes correlation between the stochastic interest rate and volatility. It is known that one limitation of the hybrid models is that the analytical pricing formula is often unavailable due to the non-affinity property of hybrid models. An efficient semi-closed form pricing formula is derived for an approximation of the fully correlated hybrid model. Our pricing formula which involves solving two phases of three-dimensional partial differential equations is evaluated through numerical implementations to confirm its accuracy

Item Type:	Conference or Workshop Item (Paper)
Uncontrolled Keywords:	variance swaps, Heston-CIR hybrid model, stochastic volatility, stochastic interest rates, realized variance.
Subjects:	Q Science > QA Mathematics > QA75 Electronic computers. Computer science
Divisions:	School of Quantitative Sciences
Depositing User:	Mrs. Norazmilah Yaakub
Date Deposited:	22 Dec 2020 01:50
Last Modified:	22 Dec 2020 01:50
URI:	https://repo.uum.edu.my/id/eprint/27990

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