Variance Swap Pricing under Markov-Modulated Jump-Diffusion Model

Shican Liu, Yu Yang, Hu Zhang, Yonghong Wu and Giancarlo Consolo

Discrete Dynamics in Nature and Society, 2021, vol. 2021, 1-16

Abstract: This paper investigates the pricing of discretely sampled variance swaps under a Markov regime-switching jump-diffusion model. The jump diffusion, as well as other parameters of the underlying stock’s dynamics, is modulated by a Markov chain representing different states of the market. A semi-closed-form pricing formula is derived by applying the generalized Fourier transform method. The counterpart pricing formula for a variance swap with continuous sampling times is also derived and compared with the discrete price to show the improvement of accuracy in our solution. Moreover, a semi-Monte-Carlo simulation is also presented in comparison with the two semi-closed-form pricing formulas. Finally, the effect of incorporating jump and regime switching on the strike price is investigated via numerical analysis.

Date: 2021
References: Add references at CitEc
Citations:

Downloads: (external link)
http://downloads.hindawi.com/journals/ddns/2021/9814605.pdf (application/pdf)
http://downloads.hindawi.com/journals/ddns/2021/9814605.xml (application/xml)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hin:jnddns:9814605

DOI: 10.1155/2021/9814605

Access Statistics for this article

More articles in Discrete Dynamics in Nature and Society from Hindawi
Bibliographic data for series maintained by Mohamed Abdelhakeem ().