Pricing Variance Swaps in a Hybrid Model of Stochastic Volatility and Interest Rate With Regime-switching
Files
Date
Authors
Supervisor
Item type
Commissioned Report
Degree name
Journal Title
Journal ISSN
Volume Title
Publisher
arXiv
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.Description
Source
arXiv:1603.08289 [q-fin.MF]
DOI
Publisher's version
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.)