Variance Swap Pricing under Markov-Modulated Jump-Diffusion Model
This paper investigates the pricing of discretely sampled variance swaps under a Markov regime-switching jump-diffusion model. The jump diffusion, as well as other parameters of the underlying stock’s dynamics, is modulated by a Markov chain representing different states of the market. A semi-closed...
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| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
| Published: |
Wiley
2021-01-01
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| Series: | Discrete Dynamics in Nature and Society |
| Online Access: | http://dx.doi.org/10.1155/2021/9814605 |
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| Summary: | This paper investigates the pricing of discretely sampled variance swaps under a Markov regime-switching jump-diffusion model. The jump diffusion, as well as other parameters of the underlying stock’s dynamics, is modulated by a Markov chain representing different states of the market. A semi-closed-form pricing formula is derived by applying the generalized Fourier transform method. The counterpart pricing formula for a variance swap with continuous sampling times is also derived and compared with the discrete price to show the improvement of accuracy in our solution. Moreover, a semi-Monte-Carlo simulation is also presented in comparison with the two semi-closed-form pricing formulas. Finally, the effect of incorporating jump and regime switching on the strike price is investigated via numerical analysis. |
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| ISSN: | 1026-0226 1607-887X |