A Time-Dependent Variance Model for Pricing Variance and Volatility Swaps

Joanna Goard

Applied Mathematical Finance, 2011, vol. 18, issue 1, 51-70

Abstract: Analytic solutions are found for prices of variance and volatility swaps under a new time-dependent stochastic model for the dynamics of variance. The main features of the new stochastic differential equation are (1) an empirically validated cν3/2 diffusion term and (2) a free function of time as a moving target in a reversion term, allowing additional flexibility for model calibration against market data.

Keywords: variance swap; volatility swap; stochastic variance (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/13504861003795019

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