Pricing and hedging of long dated variance swaps under a 3/2 volatility model

DOI10.1016/J.CAM.2014.09.032MaRDI QIDQ475659zbMATH OpenOpenAlexFDO

Authors Leunglung Chan, Eckhard Platen

Publication date 27 November 2014

Published in Journal of Computational and Applied Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1007.2968

zbMATH Keywords

confluent hypergeometric functionsvariance swapsquared Bessel process\(3/2\) volatility modelnuméraire portfolio

Mathematics Subject Classification ID

Applications of statistics to economics (62P20) Derivative securities (option pricing, hedging, etc.) (91G20) Applications of statistics to actuarial sciences and financial mathematics (62P05) Statistical methods; risk measures (91G70) Signal detection and filtering (aspects of stochastic processes) (60G35) Portfolio theory (91G10)

Abstract: This paper investigates the pricing and hedging of variance swaps under a $3/2$ volatility model. Explicit pricing and hedging formulas of variance swaps are obtained under the benchmark approach, which only requires the existence of the num'{e}raire portfolio. The growth optimal portfolio is the num'{e}raire portfolio and used as num'{e}raire together with the real world probability measure as pricing measure. This pricing concept provides minimal prices for variance swaps even when an equivalent risk neutral probability measure does not exist.

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Cited in

(7)

• Pricing exotic discrete variance swaps under the 3/2-stochastic volatility models
• Pricing and hedging of long-term futures and forward contracts by a three-factor model
• Pricing timer options and variance derivatives with closed-form partial transform under the 3/2 model
• Discretely sampled variance and volatility swaps versus their continuous approximations
• Pricing volatility derivatives under the modified constant elasticity of variance model
• Hedging for the long run
• Explicit solution simulation method for the 3/2 model

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