A stochastic hybrid model for pricing forward-start variance swaps
Recently, market players have been exposed to the astounding increase in the trading volume of variance swaps. In this paper, the forward-start nature of a variance swap is being inspected, where hybridizations of equity and interest rate models are used to evaluate the price of discretely-sampled f...
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| Format: | Conference or Workshop Item |
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2017
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| author | Roslan, Teh Raihana Nazirah |
| author_facet | Roslan, Teh Raihana Nazirah |
| author_sort | Roslan, Teh Raihana Nazirah |
| collection | UUM |
| description | Recently, market players have been exposed to the astounding increase in the trading volume of variance swaps. In this paper, the forward-start nature of a variance swap is being inspected, where hybridizations of equity and interest rate models are used to evaluate the price of discretely-sampled forward-start variance swaps. The Heston stochastic volatility model is being extended to incorporate the dynamics of the Cox-Ingersoll-Ross (CIR) stochastic interest rate model. This is essential since previous studies on variance swaps were mainly focusing on instantaneous-start variance swaps without considering the interest rate effects. This hybrid model produces an efficient semi-closed form pricing formula through the development of forward characteristic functions. The performance of this formula is investigated via simulations to demonstrate how the formula performs for different sampling times and against the real market scenario. Comparison done with the Monte Carlo simulation which was set as our main reference point reveals that our pricing formula gains almost the same precision in a shorter execution time. |
| first_indexed | 2024-07-04T06:28:08Z |
| format | Conference or Workshop Item |
| id | uum-24886 |
| institution | Universiti Utara Malaysia |
| last_indexed | 2024-07-04T06:28:08Z |
| publishDate | 2017 |
| record_format | eprints |
| spelling | uum-248862018-12-11T02:33:12Z https://repo.uum.edu.my/id/eprint/24886/ A stochastic hybrid model for pricing forward-start variance swaps Roslan, Teh Raihana Nazirah HA Statistics Recently, market players have been exposed to the astounding increase in the trading volume of variance swaps. In this paper, the forward-start nature of a variance swap is being inspected, where hybridizations of equity and interest rate models are used to evaluate the price of discretely-sampled forward-start variance swaps. The Heston stochastic volatility model is being extended to incorporate the dynamics of the Cox-Ingersoll-Ross (CIR) stochastic interest rate model. This is essential since previous studies on variance swaps were mainly focusing on instantaneous-start variance swaps without considering the interest rate effects. This hybrid model produces an efficient semi-closed form pricing formula through the development of forward characteristic functions. The performance of this formula is investigated via simulations to demonstrate how the formula performs for different sampling times and against the real market scenario. Comparison done with the Monte Carlo simulation which was set as our main reference point reveals that our pricing formula gains almost the same precision in a shorter execution time. 2017 Conference or Workshop Item NonPeerReviewed Roslan, Teh Raihana Nazirah (2017) A stochastic hybrid model for pricing forward-start variance swaps. In: A stochastic hbyrid model for pricing foward-start variances swaps. (Unpublished) http://doi.org/10.1063/1.5012176 doi:10.1063/1.5012176 doi:10.1063/1.5012176 |
| spellingShingle | HA Statistics Roslan, Teh Raihana Nazirah A stochastic hybrid model for pricing forward-start variance swaps |
| title | A stochastic hybrid model for pricing forward-start variance swaps |
| title_full | A stochastic hybrid model for pricing forward-start variance swaps |
| title_fullStr | A stochastic hybrid model for pricing forward-start variance swaps |
| title_full_unstemmed | A stochastic hybrid model for pricing forward-start variance swaps |
| title_short | A stochastic hybrid model for pricing forward-start variance swaps |
| title_sort | stochastic hybrid model for pricing forward start variance swaps |
| topic | HA Statistics |
| work_keys_str_mv | AT roslantehraihananazirah astochastichybridmodelforpricingforwardstartvarianceswaps AT roslantehraihananazirah stochastichybridmodelforpricingforwardstartvarianceswaps |