Variance Swap with Mean Reversion, Multifactor Stochastic Volatility and Jumps
This paper examines variance swap pricing using a model that integrates three major features of financial assets, namely the mean reversion in asset price, multi-factor stochastic volatility (SV) and simultaneous jumps in prices and volatility factors. Closed-form solutions are derived for vanilla v...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2016
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| Online Access: | https://hdl.handle.net/10356/81385 http://hdl.handle.net/10220/40730 |
| _version_ | 1826110059225022464 |
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| author | Pun, Chi Seng Chung, Shing Fung Wong, Hoi Ying |
| author2 | School of Physical and Mathematical Sciences |
| author_facet | School of Physical and Mathematical Sciences Pun, Chi Seng Chung, Shing Fung Wong, Hoi Ying |
| author_sort | Pun, Chi Seng |
| collection | NTU |
| description | This paper examines variance swap pricing using a model that integrates three major features of financial assets, namely the mean reversion in asset price, multi-factor stochastic volatility (SV) and simultaneous jumps in prices and volatility factors. Closed-form solutions are derived for vanilla variance swaps and gamma swaps while the solutions for corridor variance swaps and conditional variance swaps are expressed in a one-dimensional Fourier integral. The numerical tests confirm that the derived solution is accurate and efficient. Furthermore, empirical studies have shown that multi-factor SV models better capture the implied volatility surface from option data. The empirical results of this paper also show that the additional volatility factor contributes significantly to the price of variance swaps. Hence, the results favor multi-factor SV models for pricing variance swaps consistent with the implied volatility surface. |
| first_indexed | 2024-10-01T02:28:15Z |
| format | Journal Article |
| id | ntu-10356/81385 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T02:28:15Z |
| publishDate | 2016 |
| record_format | dspace |
| spelling | ntu-10356/813852023-02-28T19:31:32Z Variance Swap with Mean Reversion, Multifactor Stochastic Volatility and Jumps Pun, Chi Seng Chung, Shing Fung Wong, Hoi Ying School of Physical and Mathematical Sciences Mean reversion Variance swap Multi-factor stochastic volatility Pricing Jump diffusion This paper examines variance swap pricing using a model that integrates three major features of financial assets, namely the mean reversion in asset price, multi-factor stochastic volatility (SV) and simultaneous jumps in prices and volatility factors. Closed-form solutions are derived for vanilla variance swaps and gamma swaps while the solutions for corridor variance swaps and conditional variance swaps are expressed in a one-dimensional Fourier integral. The numerical tests confirm that the derived solution is accurate and efficient. Furthermore, empirical studies have shown that multi-factor SV models better capture the implied volatility surface from option data. The empirical results of this paper also show that the additional volatility factor contributes significantly to the price of variance swaps. Hence, the results favor multi-factor SV models for pricing variance swaps consistent with the implied volatility surface. Accepted version 2016-06-21T06:51:43Z 2019-12-06T14:29:45Z 2016-06-21T06:51:43Z 2019-12-06T14:29:45Z 2015 2015 Journal Article Pun, C. S., Chung, S. F., & Wong, H. Y. (2015). Variance swap with mean reversion, multifactor stochastic volatility and jumps. European Journal of Operational Research, 245(2), 571-580. 0377-2217 https://hdl.handle.net/10356/81385 http://hdl.handle.net/10220/40730 10.1016/j.ejor.2015.03.026 194823 en European Journal of Operational Research © 2015 Elsevier. This is the author created version of a work that has been peer reviewed and accepted for publication by European Journal of Operational Research, Elsevier. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1016/j.ejor.2015.03.026]. application/pdf |
| spellingShingle | Mean reversion Variance swap Multi-factor stochastic volatility Pricing Jump diffusion Pun, Chi Seng Chung, Shing Fung Wong, Hoi Ying Variance Swap with Mean Reversion, Multifactor Stochastic Volatility and Jumps |
| title | Variance Swap with Mean Reversion, Multifactor Stochastic Volatility and Jumps |
| title_full | Variance Swap with Mean Reversion, Multifactor Stochastic Volatility and Jumps |
| title_fullStr | Variance Swap with Mean Reversion, Multifactor Stochastic Volatility and Jumps |
| title_full_unstemmed | Variance Swap with Mean Reversion, Multifactor Stochastic Volatility and Jumps |
| title_short | Variance Swap with Mean Reversion, Multifactor Stochastic Volatility and Jumps |
| title_sort | variance swap with mean reversion multifactor stochastic volatility and jumps |
| topic | Mean reversion Variance swap Multi-factor stochastic volatility Pricing Jump diffusion |
| url | https://hdl.handle.net/10356/81385 http://hdl.handle.net/10220/40730 |
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