Discrete variance swap in a rough volatility economy

Yiru Xi and Hoi Ying Wong

Journal of Futures Markets, 2021, vol. 41, issue 10, 1640-1654

Abstract: The discrete variance swap is one of the most popular volatility derivatives traded on the over‐the‐counter market. This paper discusses its valuation in a rough volatility economy and the impact of roughness on the term structure of discrete variance swap prices. A semianalytic solution is obtained through stochastic convolution. Our numerical experiments show that the roughness of volatility has a significant impact on the concavity of the variance swap term structure.

Date: 2021
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