COVARIANCE AND CORRELATION SWAPS FOR FINANCIAL MARKETS WITH MARKOV-MODULATED VOLATILITIES

Giovanni Salvi () and Anatoliy V. Swishchuk ()
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Giovanni Salvi: Department of Methods and Models for Economics Territory and Finance MEMOTEF, 'Sapienza' University of Rome, Via del Castro Laurenziano, 9, Rome, 00161, Italy
Anatoliy V. Swishchuk: Department of Mathematics and Statistics, University of Calgary, 2500 University Drive NW, Calgary, Alberta T2N 1N4, Canada

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 01, 1-23

Abstract: In this paper, we price covariance and correlation swaps for financial markets with Markov-modulated volatilities. As an example, we consider stochastic volatility driven by a two-state continuous Markov chain. In this case, numerical examples are presented for VIX and VXN volatility indices (S&P 500 and NASDAQ-100, from January 2004 to June 2012). We also use VIX (January 2004 to June 2012) to price variance and volatility swaps for the two-state Markov-modulated volatility, and we present a numerical result in this case.

Keywords: Markov-modulated volatility; covariance swaps; correlation swaps; VIX index; VXN index; variance swaps; volatility swaps (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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DOI: 10.1142/S021902491450006X

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