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Pricing options on realized variance

Author

Listed:
  • Peter Carr
  • Hélyette Geman
  • Dilip Madan
  • Marc Yor

Abstract

Models which hypothesize that returns are pure jump processes with independent increments have been shown to be capable of capturing the observed variation of market prices of vanilla stock options across strike and maturity. In this paper, these models are employed to derive in closed form the prices of derivatives written on future realized quadratic variation. Alternative work on pricing derivatives on quadratic variation has alternatively assumed that the underlying returns process is continuous over time. We compare the model values of derivatives on quadratic variation for the two types of models and find substantial differences. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Peter Carr & Hélyette Geman & Dilip Madan & Marc Yor, 2005. "Pricing options on realized variance," Finance and Stochastics, Springer, vol. 9(4), pages 453-475, October.
    • Handle: RePEc:spr:finsto:v:9:y:2005:i:4:p:453-475
    DOI: 10.1007/s00780-005-0155-x
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