East Asian J. Appl. Math., 10 (2020), pp. 594-619.
Published online: 2020-06
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This paper investigates the pricing of discrete-sampled variance swaps driven by a generalised stochastic model taking into account stochastic volatility, stochastic interest rate and jump-diffusion process. The model includes various existing models as special cases, such as the CIR model, the Heston CIR model, and the multi-factor CIR model. The integral term arising from the jump-diffusion is dealt with by employing the characteristic function and Fourier convolution. By applying a high-dimensional generalised hybrid method, a semi-analytic solution is derived. The effects of stochastic interest rate, stochastic volatility and jump rate on variance swap price are investigated. It is shown that both the stochastic volatility and the jump rate have significant effects on the fair strike price, while the effect of the stochastic interest rate is minor and can be ignored.
}, issn = {2079-7370}, doi = {https://doi.org/10.4208/eajam.071119.010320}, url = {http://global-sci.org/intro/article_detail/eajam/16984.html} }This paper investigates the pricing of discrete-sampled variance swaps driven by a generalised stochastic model taking into account stochastic volatility, stochastic interest rate and jump-diffusion process. The model includes various existing models as special cases, such as the CIR model, the Heston CIR model, and the multi-factor CIR model. The integral term arising from the jump-diffusion is dealt with by employing the characteristic function and Fourier convolution. By applying a high-dimensional generalised hybrid method, a semi-analytic solution is derived. The effects of stochastic interest rate, stochastic volatility and jump rate on variance swap price are investigated. It is shown that both the stochastic volatility and the jump rate have significant effects on the fair strike price, while the effect of the stochastic interest rate is minor and can be ignored.