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Semiclassical Pricing of Variance Swaps in the CEV Model

In: Mathematical and Statistical Methods for Actuarial Sciences and Finance

Author

Listed:
  • Axel A. Araneda

    (Masaryk University, Institute of Financial Complex Systems, Faculty of Economics and Administration)

  • Marcelo J. Villena

    (Universidad Técnica Federico Santa María, Department of Commercial Engineering)

Abstract

Path integrals are a well-known tool in quantum mechanics and statistical physics. They could be used to derive the propagator or kernel of stochastic processes, analogous to solving the Fokker-Planck equation. In finance, they become an alternative tool to address the valuation of derivatives. Here, taking advantage of the hedging formula of the realized variance by means of the log contract, we use path integrals for the pricing of variance swaps under the Constant Elasticity of Variance (CEV) model, approximating analytically the propagator for the log contract by semiclassical arguments. Our results demonstrate that the semiclassical method provides an alternative and efficient computation which shows a high level of accuracy but at the same time lower execution times.

Suggested Citation

  • Axel A. Araneda & Marcelo J. Villena, 2022. "Semiclassical Pricing of Variance Swaps in the CEV Model," Springer Books, in: Marco Corazza & Cira Perna & Claudio Pizzi & Marilena Sibillo (ed.), Mathematical and Statistical Methods for Actuarial Sciences and Finance, pages 25-30, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-99638-3_5
    DOI: 10.1007/978-3-030-99638-3_5
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