Pricing swaps and options on quadratic variation under stochastic time change models -- discrete observations case (Q5962135)

The main contributions of this paper are: a) to consider variance and volatility swaps under discrete observations; b) to use a forward characteristic function (c.f.) approach and propose a new asymptotic method which allows an analytical representation for the quadratic variation of a Lévy process with stochastic time change, if the latter is an affine process, and the annualized time variation between the observations is relatively small; c) under conditions it is proven that the annualized quadratic variation (q.v.) of the Lévy process with stochastic time determined by a pure diffusion process is given by the annualized realized variance times a constant coefficient \(\xi\), which is determined via derivatives of the c.f. of the underlying Lévy process; d) under the previous conditions, for a jump-diffusion process, it is also proved that the q.v. of the Lévy process is given by a product of the annualized realized variance and a constant \(\xi\) plus some constant \(\eta\), which is determined via derivatives of the c.f. of the underlying Lévy process and jump integrals of the time change process. Some further extensions are provided.