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Covariance And Correlation Swaps For Financial Markets With Markov-Modulated Volatilities

Author

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  • GIOVANNI SALVI

    () (Department of Methods and Models for Economics Territory and Finance MEMOTEF, 'Sapienza' University of Rome, Via del Castro Laurenziano, 9, Rome, 00161, Italy)

  • ANATOLIY V. SWISHCHUK

    () (Department of Mathematics and Statistics, University of Calgary, 2500 University Drive NW, Calgary, Alberta T2N 1N4, Canada)

Abstract

In this paper, we price covariance and correlation swaps for financial markets with Markov-modulated volatilities. As an example, we consider stochastic volatility driven by a two-state continuous Markov chain. In this case, numerical examples are presented for VIX and VXN volatility indices (S&P 500 and NASDAQ-100, from January 2004 to June 2012). We also use VIX (January 2004 to June 2012) to price variance and volatility swaps for the two-state Markov-modulated volatility, and we present a numerical result in this case.

Suggested Citation

  • Giovanni Salvi & Anatoliy V. Swishchuk, 2014. "Covariance And Correlation Swaps For Financial Markets With Markov-Modulated Volatilities," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-23.
  • Handle: RePEc:wsi:ijtafx:v:17:y:2014:i:01:n:s021902491450006x
    DOI: 10.1142/S021902491450006X
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