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A Time-Dependent Variance Model for Pricing Variance and Volatility Swaps

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  • Joanna Goard

Abstract

Analytic solutions are found for prices of variance and volatility swaps under a new time-dependent stochastic model for the dynamics of variance. The main features of the new stochastic differential equation are (1) an empirically validated cν3/2 diffusion term and (2) a free function of time as a moving target in a reversion term, allowing additional flexibility for model calibration against market data.

Suggested Citation

  • Joanna Goard, 2011. "A Time-Dependent Variance Model for Pricing Variance and Volatility Swaps," Applied Mathematical Finance, Taylor & Francis Journals, vol. 18(1), pages 51-70.
  • Handle: RePEc:taf:apmtfi:v:18:y:2011:i:1:p:51-70
    DOI: 10.1080/13504861003795019
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    References listed on IDEAS

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    1. Steven L. Heston & Saikat Nandi, 2000. "Derivatives on volatility: some simple solutions based on observables," FRB Atlanta Working Paper 2000-20, Federal Reserve Bank of Atlanta.
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