Simulation of Stochastic Volatility Variance Swap

Shican Liu, Yanli Zhou, Yonghong Wu and Xiangyu Ge
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Shican Liu: Department of Mathematics and Statistics Curtin University
Yanli Zhou: School of Finance, Zhongnan University of Economics and Law
Yonghong Wu: Department of Mathematics and Statistics Curtin University
Xiangyu Ge: Zhongnan University of Economics and Law

Chapter Chapter 15 in Recent Developments in Data Science and Business Analytics, 2018, pp 139-147 from Springer

Abstract: Abstract This paper aims to propose efficient mathematical model of variance swap to study the effect of stochastic volatility in different time-scales on the option pricing. Two types of stochastic volatility, including Ornstein-Uhlenbeck (OU) process and Cox-Ingersoll-Ross (CIR) process are considered. Analytical solution of CIR model is presented. For the OU process, a numerical algorithm based on the finite element approach is established for solution of the model.

Keywords: Variance swaps; Time-scale; Stochastic volatility; Finite element method (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-319-72745-5_15

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DOI: 10.1007/978-3-319-72745-5_15

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