Advanced Search
MyIDEAS: Login to save this article or follow this journal

Pricing Volatility Swaps Under Heston's Stochastic Volatility Model with Regime Switching


Author Info

  • Robert Elliott
  • Tak Kuen Siu
  • Leunglung Chan


A model is developed for pricing volatility derivatives, such as variance swaps and volatility swaps under a continuous-time Markov-modulated version of the stochastic volatility (SV) model developed by Heston. In particular, it is supposed that the parameters of this version of Heston's SV model depend on the states of a continuous-time observable Markov chain process, which can be interpreted as the states of an observable macroeconomic factor. The market considered is incomplete in general, and hence, there is more than one equivalent martingale pricing measure. The regime switching Esscher transform used by Elliott et al. is adopted to determine a martingale pricing measure for the valuation of variance and volatility swaps in this incomplete market. Both probabilistic and partial differential equation (PDE) approaches are considered for the valuation of volatility derivatives.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL:
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 14 (2007)
Issue (Month): 1 ()
Pages: 41-62

as in new window
Handle: RePEc:taf:apmtfi:v:14:y:2007:i:1:p:41-62

Contact details of provider:
Web page:

Order Information:

Related research

Keywords: Regime switching Esscher transform; Markov-modulated Heston's SV model; observable Markov chain process; volatility swaps; variance swaps; regime switching OU-process;


No references listed on IDEAS
You can help add them by filling out this form.


Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Zhengjun Jiang & Martijn Pistorius, 2008. "Optimal dividend distribution under Markov-regime switching," Papers 0812.4978,, revised Apr 2011.
  2. Marcos Escobar & Daniela Neykova & Rudi Zagst, 2014. "Portfolio Optimization in Affine Models with Markov Switching," Papers 1403.5247,
  3. Qi-min, Zhang, 2011. "Convergence of numerical solutions for a class of stochastic age-dependent capital system with Markovian switching," Economic Modelling, Elsevier, vol. 28(3), pages 1195-1201, May.
  4. Siu, Tak Kuen, 2008. "A game theoretic approach to option valuation under Markovian regime-switching models," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 1146-1158, June.
  5. Leunglung Chan & Eckhard Platen, 2010. "Exact Pricing and Hedging Formulas of Long Dated Variance Swaps under a $3/2$ Volatility Model," Papers 1007.2968,, revised Jan 2011.
  6. Lorenzo Torricelli, 2012. "Valuation of asset and volatility derivatives using decoupled time-changed L\'{e}vy processes," Papers 1210.5479,, revised Feb 2014.


This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


Access and download statistics


When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:14:y:2007:i:1:p:41-62. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.