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Variance swap dynamics

Author

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  • K. Detlefsen
  • W. K. Härdle

Abstract

We compare several parametric and non-parametric approaches for modelling variance swap curves by conducting an in-sample and an out-of-sample analysis using market prices. The forecasted Heston model gives the best overall performance. Moreover, the static Heston model highlights some problems of stochastic volatility models in option pricing of forward starting products.

Suggested Citation

  • K. Detlefsen & W. K. Härdle, 2012. "Variance swap dynamics," Quantitative Finance, Taylor & Francis Journals, vol. 13(5), pages 675-685, November.
    • Handle: RePEc:taf:quantf:v:13:y:2012:i:5:p:675-685
    DOI: 10.1080/14697688.2012.749420
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    References listed on IDEAS

    as
    1. Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
    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. Hans Buehler, 2006. "Consistent Variance Curve Models," Finance and Stochastics, Springer, vol. 10(2), pages 178-203, April.
    4. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    5. Hans Buehler, 2006. "Consistent Variance Curve Models," Finance and Stochastics, Springer, vol. 10(2), pages 178-203, April.
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