TY - JOUR
T1 - Variance Swap Pricing under Hybrid Jump Model
AU - Liu , S.
AU - Wiwatanapataphee , B.
AU - Wu , Y.H.
AU - Yang , Y.
JO - East Asian Journal on Applied Mathematics
VL - 3
SP - 594
EP - 619
PY - 2020
DA - 2020/06
SN - 10
DO - http://doi.org/10.4208/eajam.071119.010320
UR - https://global-sci.org/intro/article_detail/eajam/16984.html
KW - Time-scale, stochastic volatility, generalised Fourier transform, variance swap.
AB - <p style="text-align: justify;">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.</p>