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Options on Realized Variance in Log-OU Models

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  • Gabriel G. Drimus

Abstract

We study the pricing of options on realized variance in a general class of Log-OU (Ornstein--Ühlenbeck) stochastic volatility models. The class includes several important models proposed in the literature. Having as common feature the log-normal law of instantaneous variance, the application of standard Fourier--Laplace transform methods is not feasible. We derive extensions of Asian pricing methods, to obtain bounds, in particular, a very tight lower bound for options on realized variance.

Suggested Citation

  • Gabriel G. Drimus, 2012. "Options on Realized Variance in Log-OU Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 19(5), pages 477-494, November.
  • Handle: RePEc:taf:apmtfi:v:19:y:2012:i:5:p:477-494
    DOI: 10.1080/1350486X.2011.639951
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    Cited by:

    1. Andrea Barletta & Elisa Nicolato & Stefano Pagliarani, 2019. "The short‐time behavior of VIX‐implied volatilities in a multifactor stochastic volatility framework," Mathematical Finance, Wiley Blackwell, vol. 29(3), pages 928-966, July.
    2. Yijuan Liang & Xiuchuan Xu, 2019. "Variance and Dimension Reduction Monte Carlo Method for Pricing European Multi-Asset Options with Stochastic Volatilities," Sustainability, MDPI, vol. 11(3), pages 1-21, February.

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