Options on Realized Variance in Log-OU Models

Gabriel G. Drimus

Applied Mathematical Finance, 2012, vol. 19, issue 5, 477-494

Abstract: We study the pricing of options on realized variance in a general class of Log-OU (Ornstein--Ühlenbeck) stochastic volatility models. The class includes several important models proposed in the literature. Having as common feature the log-normal law of instantaneous variance, the application of standard Fourier--Laplace transform methods is not feasible. We derive extensions of Asian pricing methods, to obtain bounds, in particular, a very tight lower bound for options on realized variance.

Date: 2012
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DOI: 10.1080/1350486X.2011.639951

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