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Analytical pricing formulas for discretely sampled generalized variance swaps under stochastic time change

Author

Listed:
  • Zhigang Tong

    (Department of Mathematics and Statistics, University of Ottawa, 585 King Edward, Ottawa, Ontario, K1N 6N5, Canada)

  • Allen Liu

    (Model Validation, Enterprise Risk and Portfolio Management, Bank of Montreal, 27th Floor, First Canadian Place, Toronto, Ontario, M5X 1A3, Canada)

Abstract

We propose a new class of models for pricing generalized variance swaps. We assume that, in the most general form, the process for the asset price is a function of a general time-homogeneous diffusion process belonging to a symmetric pricing semigroup, time changed by a composition of a Lévy subordinator and an absolutely continuous process. We derive the analytical pricing formulas for various types of generalized variance swaps based on eigenfunction expansion method. We also numerically implement the model and test its sensitivity to some of the key parameters of the model.

Suggested Citation

  • Zhigang Tong & Allen Liu, 2017. "Analytical pricing formulas for discretely sampled generalized variance swaps under stochastic time change," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-24, June.
    • Handle: RePEc:wsi:ijfexx:v:04:y:2017:i:02n03:n:s2424786317500281
    DOI: 10.1142/S2424786317500281
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    References listed on IDEAS

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    Cited by:

    1. Tong, Zhigang & Liu, Allen, 2022. "Pricing variance swaps under subordinated Jacobi stochastic volatility models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 593(C).
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    3. Kevin Z. Tong & Allen Liu, 2019. "Option pricing in a subdiffusive constant elasticity of variance (CEV) model," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(02), pages 1-21, June.

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