Pricing and hedging of long dated variance swaps under a 3/2 volatility model

Leunglung Chan and Eckhard Platen ()
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Leunglung Chan: University of NSW

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: This paper investigates the pricing and hedging of variance swaps under a 3/2 volatility model using explicit formulae. Pricing and hedging is performed under the benchmark approach, which only requires the existence of the numéraire portfolio. The growth optimal portfolio is used as numéraire together with the real world probability measure as pricing measure. This real world pricing concept provides minimal prices for variance swaps even when an equivalent risk neutral probability measure does not exist.

Keywords: 3/2 volatility model; Variance swap; Numéraire portfolio; Squared Bessel process; Confluent hypergeometric functions (search for similar items in EconPapers)
Pages: 16 pages
Date: 2015-01-01
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Citations: View citations in EconPapers (6)

Published as: Chan, L. and Platen, E., 2015, "Pricing and hedging of long dated variance swaps under a 3/2 volatility model", Journal of Computational and Applied Mathematics, 278, 181-196.

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