 Pricing forward-start variance swaps with stochastic volatilitySong-Ping Zhu and Guang-Hua Lian Applied Mathematics and Computation, 2015, vol. 250, issue C, 920-933 Abstract: In this paper, a general approach is presented to price forward-start variance swaps with discrete sampling times, based on the Heston (1993)’s two-factor stochastic volatility model. Using this approach we work out two analytical closed-form formulae for the price of forward-start variance swap with the realized variance being defined by the actual-return realized variance and the log-return realized variance, respectively. The main features of this new approach and the developed formulae as a result include: (1) treating the pricing problem of variance swaps with different definitions of discretely-sampled realized variance in a highly unified way; (2) easily obtaining analytical closed-form solutions for forward-start variance swaps with two popularly-used definitions of discretely-sampled realized variance; (3) enabling the investigation of some important properties of the forward-start variance swaps, utilizing the elegant and simple form of the obtained solutions. With these advantages, we believe that the approach can be applied to price variance swaps based on other stochastic volatility models as well. Keywords: Variance swaps; Heston model; Characteristic function; Stochastic volatility (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:apmaco:v:250:y:2015:i:c:p:920-933 DOI: 10.1016/j.amc.2014.10.050 Access Statistics for this article Applied Mathematics and Computation is currently edited by Theodore Simos More articles in Applied Mathematics and Computation from Elsevier |
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