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Pricing and hedging of long dated variance swaps under a 3/2 volatility model

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This paper investigates the pricing and hedging of variance swaps under a 3/2 volatility model using explicit formulae. Pricing and hedging is performed under the benchmark approach, which only requires the existence of the numéraire portfolio. The growth optimal portfolio is used as numéraire together with the real world probability measure as pricing measure. This real world pricing concept provides minimal prices for variance swaps even when an equivalent risk neutral probability measure does not exist.

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  • Leunglung Chan & Eckhard Platen, 2015. "Pricing and hedging of long dated variance swaps under a 3/2 volatility model," Published Paper Series 2015-6, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:ppaper:2015-6
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    Cited by:

    1. Leunglung Chan & Eckhard Platen, 2015. "Pricing Volatility Derivatives Under the Modified Constant Elasticity of Variance Model," Research Paper Series 360, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Chi Hung Yuen & Wendong Zheng & Yue Kuen Kwok, 2015. "Pricing Exotic Discrete Variance Swaps under the 3/2-Stochastic Volatility Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(5), pages 421-449, November.
    3. Iro Ren'e Kouarfate & Michael A. Kouritzin & Anne MacKay, 2020. "Explicit solution simulation method for the 3/2 model," Papers 2009.09058, arXiv.org, revised Jan 2021.
    4. Jan Baldeaux & Alexander Badran, 2014. "Consistent Modelling of VIX and Equity Derivatives Using a 3/2 plus Jumps Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 21(4), pages 299-312, September.
    5. Weiyi Liu & Song‐Ping Zhu, 2019. "Pricing variance swaps under the Hawkes jump‐diffusion process," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(6), pages 635-655, June.
    6. Wendong Zheng & Pingping Zeng, 2016. "Pricing timer options and variance derivatives with closed-form partial transform under the 3/2 model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 23(5), pages 344-373, September.

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