PRICING JOINT CLAIMS ON AN ASSET AND ITS REALIZED VARIANCE IN STOCHASTIC VOLATILITY MODELS

Lorenzo Torricelli ()
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Lorenzo Torricelli: Department of Mathematics, University College London, Gower Street WC1E 6BT, London, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2013, vol. 16, issue 01, 1-18

Abstract: In the setting of a stochastic volatility model, we find a general pricing equation for the class of payoffs depending on the terminal value of a market asset and its final quadratic variation. This provides a pricing tool for European-style claims paying off at maturity a joint function of the underlying and its realized volatility or variance. We study the solution under various specific stochastic volatility models, give a formula for the computation of the delta and gamma of these claims, and introduce some new interesting payoffs that can be valued by means of the general pricing equation. Numerical results are given and compared to those from plain vanilla derivatives.

Keywords: Volatility derivatives; stochastic volatility models; partial differential equations; parabolic equations; target volatility option (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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DOI: 10.1142/S0219024913500052

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