Pricing options on realized variance

Peter Carr, Hélyette Geman (), Dilip Madan () and Marc Yor ()

Finance and Stochastics, 2005, vol. 9, issue 4, 453-475

Abstract: Models which hypothesize that returns are pure jump processes with independent increments have been shown to be capable of capturing the observed variation of market prices of vanilla stock options across strike and maturity. In this paper, these models are employed to derive in closed form the prices of derivatives written on future realized quadratic variation. Alternative work on pricing derivatives on quadratic variation has alternatively assumed that the underlying returns process is continuous over time. We compare the model values of derivatives on quadratic variation for the two types of models and find substantial differences. Copyright Springer-Verlag Berlin/Heidelberg 2005

Keywords: Options on variance swaps; options on time changes; self decomposability and its hierarchy (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (47)

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DOI: 10.1007/s00780-005-0155-x

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