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 |
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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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| _version_ | 1832567425287061504 |
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| author | Shican Liu Yu Yang Hu Zhang Yonghong Wu |
| author_facet | Shican Liu Yu Yang Hu Zhang Yonghong Wu |
| author_sort | Shican Liu |
| collection | DOAJ |
| description | 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. |
| format | Article |
| id | doaj-art-10af52ca617e450db9c73d02cc7747d2 |
| institution | Kabale University |
| issn | 1026-0226 1607-887X |
| language | English |
| publishDate | 2021-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Discrete Dynamics in Nature and Society |
| spelling | doaj-art-10af52ca617e450db9c73d02cc7747d22025-02-03T01:01:24ZengWileyDiscrete Dynamics in Nature and Society1026-02261607-887X2021-01-01202110.1155/2021/98146059814605Variance Swap Pricing under Markov-Modulated Jump-Diffusion ModelShican Liu0Yu Yang1Hu Zhang2Yonghong Wu3School of Statistics and Mathematics, Zhongnan University of Economics and Law, Wuhan 430073, ChinaSchool of Electrical Engineering Computing and Mathematical Sciences, Curtin University, Perth 6845, AustraliaSchool of Statistics and Mathematics, Zhongnan University of Economics and Law, Wuhan 430073, ChinaSchool of Electrical Engineering Computing and Mathematical Sciences, Curtin University, Perth 6845, AustraliaThis 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.http://dx.doi.org/10.1155/2021/9814605 |
| spellingShingle | Shican Liu Yu Yang Hu Zhang Yonghong Wu Variance Swap Pricing under Markov-Modulated Jump-Diffusion Model Discrete Dynamics in Nature and Society |
| title | Variance Swap Pricing under Markov-Modulated Jump-Diffusion Model |
| title_full | Variance Swap Pricing under Markov-Modulated Jump-Diffusion Model |
| title_fullStr | Variance Swap Pricing under Markov-Modulated Jump-Diffusion Model |
| title_full_unstemmed | Variance Swap Pricing under Markov-Modulated Jump-Diffusion Model |
| title_short | Variance Swap Pricing under Markov-Modulated Jump-Diffusion Model |
| title_sort | variance swap pricing under markov modulated jump diffusion model |
| url | http://dx.doi.org/10.1155/2021/9814605 |
| work_keys_str_mv | AT shicanliu varianceswappricingundermarkovmodulatedjumpdiffusionmodel AT yuyang varianceswappricingundermarkovmodulatedjumpdiffusionmodel AT huzhang varianceswappricingundermarkovmodulatedjumpdiffusionmodel AT yonghongwu varianceswappricingundermarkovmodulatedjumpdiffusionmodel |