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Analytic solutions of variance swaps for Heston models with stochastic long-run mean of variance and jumps

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  • Jing Fu

Abstract

This paper presents the pricing formulas for variance swaps within the Heston model that incorporates jumps and a stochastic long-term mean for the underlying asset. By leveraging the Feynman-Kac theorem, we derive a partial integro-differential equation (PIDE) to obtain the joint moment-generating function for the aforementioned model. Furthermore, we provide a series pricing formula for discretely sampled variance swap, derived through the use of this joint moment-generating function. Additionally, we discuss the limiting properties of the pricing formula for discretely sampled variance swap, namely, the pricing formula for continuously sampled variance swap. Finally, to demonstrate the efficacy of the pricing formula, we conduct several numerical simulation experiments, including comparisons with Monte Carlo (MC) simulation results and an analysis of the impact of parameter variations on the strike price of variance swaps.

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  • Jing Fu, 2025. "Analytic solutions of variance swaps for Heston models with stochastic long-run mean of variance and jumps," PLOS ONE, Public Library of Science, vol. 20(3), pages 1-17, March.
    • Handle: RePEc:plo:pone00:0318886
    DOI: 10.1371/journal.pone.0318886
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    References listed on IDEAS

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    1. Stein, Elias M & Stein, Jeremy C, 1991. "Stock Price Distributions with Stochastic Volatility: An Analytic Approach," The Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 727-752.
    2. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    3. Rainer Schöbel & Jianwei Zhu, 1999. "Stochastic Volatility With an Ornstein–Uhlenbeck Process: An Extension," Review of Finance, European Finance Association, vol. 3(1), pages 23-46.
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