 Analytically pricing variance and volatility swaps under a Markov-modulated model with liquidity risksXin-Jiang He and Sha Lin The North American Journal of Economics and Finance, 2023, vol. 67, issue C Abstract: This paper determines strike prices of discretely sampled variance/volatility swaps taking into account stochastic liquidity risks and the switching of economic conditions. We adopt nonlinear regime switching volatility to reflect how asset prices are affected by economic cycles, and market prices of assets are discounted according to the level of market liquidity. We then establish a risk-neutral measure under regime switching Esscher transform, so that analytical valuation of variance/volatility swaps can be completed based on the closed-form forward characteristic function. The limiting behavior of discretely sampled variance/volatility swaps is also considered through the investigation of pricing continuously sampled variance/volatility swaps. Finally, based on the results from numerical implementation, we confirm that the new model is very flexible in reflecting different influence associated with common real market observations. Keywords: Variance/volatility swaps; Stochastic liquidity; Regime switching; Forward characteristic function; Nonlinearity (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:ecofin:v:67:y:2023:i:c:s1062940823000414 DOI: 10.1016/j.najef.2023.101918 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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