GARCH and Volatility swaps

Alireza Javaheri, Paul Wilmott and Espen Haug

Quantitative Finance, 2004, vol. 4, issue 5, 589-595

Abstract: This article discusses the valuation and hedging of volatility swaps within the frame of a GARCH (1,1) stochastic volatility model. First we use a general and flexible partial differential equation (PDE) approach to determine the first two moments of the realized variance in a continuous or discrete context. Next, and also the main contribution of the paper, is a closed-form approximate solution for the so-called convexity correction, when the risk-neutral process for the instantaneous variance is a continuous time limit of a GARCH (1,1) model. Following this, we provide a numerical example using S&P 500 data.

Date: 2004
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Citations: View citations in EconPapers (13)

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DOI: 10.1080/14697680400000040

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