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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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Main Author: Roslan, Teh Raihana Nazirah
Format: Conference or Workshop Item
Published: 2017
Subjects:
HA Statistics
Online Access:http://repo.uum.edu.my/24886/
http://doi.org/10.1063/1.5012176
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spelling my.uum.repo.248862018-12-11T02:33:12Z http://repo.uum.edu.my/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 (Unpublished) http://doi.org/10.1063/1.5012176 doi:10.1063/1.5012176
institution Universiti Utara Malaysia
building UUM Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Universiti Utara Malaysia
content_source UUM Institutionali Repository
url_provider http://repo.uum.edu.my/
topic HA Statistics
spellingShingle HA Statistics
Roslan, Teh Raihana Nazirah
A stochastic hybrid model for pricing forward-start variance swaps
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.
format Conference or Workshop Item
author Roslan, Teh Raihana Nazirah
author_facet Roslan, Teh Raihana Nazirah
author_sort Roslan, Teh Raihana Nazirah
title A stochastic hybrid model for pricing forward-start variance swaps
title_short 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_sort stochastic hybrid model for pricing forward-start variance swaps
publishDate 2017
url http://repo.uum.edu.my/24886/
http://doi.org/10.1063/1.5012176
_version_ 1644284168063942656
score 13.211869

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