Pricing variance swaps under the Hawkes jump‐diffusion process

Weiyi Liu and Song‐Ping Zhu

Journal of Futures Markets, 2019, vol. 39, issue 6, 635-655

Abstract: This paper presents an analytical approach for pricing variance swaps with discrete sampling times when the underlying asset follows a Hawkes jump‐diffusion process characterized with both stochastic volatility and clustered jumps. A significantly simplified method, with which there is no need to solve partial differential equations, is used to derive a closed‐form pricing formula. A distinguished feature is that many recently published formulas can be shown to be special cases of the one presented here. Some numerical examples are provided with results demonstrating that jump clustering indeed has a significant impact on the price of variance swaps.

Date: 2019
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