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Convergence of the discrete variance swap in time-homogeneous diffusion models

Listed author(s):
  • Carole Bernard
  • Zhenyu Cui
  • Don McLeish
Registered author(s):

    In stochastic volatility models based on time-homogeneous diffusions, we provide a simple necessary and sufficient condition for the discretely sampled fair strike of a variance swap to converge to the continuously sampled fair strike. It extends Theorem 3.8 of Jarrow, Kchia, Larsson and Protter (2013) and gives an affirmative answer to a problem posed in this paper in the case of 3/2 stochastic volatility model. We also give precise conditions (not based on asymptotics) when the discrete fair strike of the variance swap is higher than the continuous one and discuss the convex order conjecture proposed by Keller-Ressel and Griessler (2012) in this context.

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    Paper provided by in its series Papers with number 1310.0099.

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    Date of creation: Sep 2013
    Handle: RePEc:arx:papers:1310.0099
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