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  •   Open Research
  • AUT Faculties
  • Faculty of Design and Creative Technologies (Te Ara Auaha)
  • School of Engineering, Computer and Mathematical Sciences - Te Kura Mātai Pūhanga, Rorohiko, Pāngarau
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Pricing Variance Swaps in a Hybrid Model of Stochastic Volatility and Interest Rate With Regime-switching

Cao, J; Nazirah Roslan, R; Zhang, W
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1603.08289v1.pdf (207.4Kb)
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http://hdl.handle.net/10292/10042
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Abstract
In this paper, we consider the problem of pricing discretely-sampled variance swaps based on a hybrid model of stochastic volatility and stochastic interest rate with regime-switching. Our modeling framework extends the Heston stochastic volatility model by including the CIR stochastic interest rate and model parameters that switch according to a continuous-time observable Markov chain process. A semi-closed form pricing formula for variance swaps is derived. The pricing formula is assessed through numerical implementations, and the impact of including regime-switching on pricing variance swaps is also discussed.
Keywords
Heston-CIR hybrid model; Regime-switching; Realized variance; Stochastic interest rate; Stochastic volatility; Variance swap
Date
March 28, 2016
Source
arXiv:1603.08289 [q-fin.MF]
Item Type
Commissioned Report
Publisher
arXiv
Publisher's Version
https://arxiv.org/pdf/1603.08289
Rights Statement
Granting rights for arXiv to distribute an article does not preclude later copyright assignment. Authors are thus free to publish submissions that already appear on arXiv. Authors may wish to inform the journal publisher that a prior non-exclusive license exists before transferring copyright or granting a publication license. Please check the policies of any potential publication venue before uploading to arXiv. (For the policy information of many publishers, see the SHERPA/RoMEO site.)

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