Valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates
In this paper, we evaluate the price of discretely-sampled variance swaps using a equity-interest rate hybrid model. Our modeling framework extends the Heston stochastic volatility model by including the Cox-Ingersoll-Ross stochastic interest rates and imposes correlation between the stochastic inte...
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2014
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my.uum.repo.279902020-12-22T01:50:02Z http://repo.uum.edu.my/27990/ Valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates Roslan, Teh Raihana Nazirah Zhang, Wenjun Cao, Jiling QA75 Electronic computers. Computer science In this paper, we evaluate the price of discretely-sampled variance swaps using a equity-interest rate hybrid model. Our modeling framework extends the Heston stochastic volatility model by including the Cox-Ingersoll-Ross stochastic interest rates and imposes correlation between the stochastic interest rate and volatility. It is known that one limitation of the hybrid models is that the analytical pricing formula is often unavailable due to the non-affinity property of hybrid models. An efficient semi-closed form pricing formula is derived for an approximation of the fully correlated hybrid model. Our pricing formula which involves solving two phases of three-dimensional partial differential equations is evaluated through numerical implementations to confirm its accuracy 2014 Conference or Workshop Item PeerReviewed application/pdf en http://repo.uum.edu.my/27990/1/ASM-02%201%208.pdf Roslan, Teh Raihana Nazirah and Zhang, Wenjun and Cao, Jiling (2014) Valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates. In: 8th International Conference on Applied Mathematics, Sumulation and Modeling Recent Advances in Applied Mathematics, Modeling and Simulation, 11/22/2014 - 11/24/2014, Florence, Italy. |
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QA75 Electronic computers. Computer science Roslan, Teh Raihana Nazirah Zhang, Wenjun Cao, Jiling Valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates |
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In this paper, we evaluate the price of discretely-sampled variance swaps using a equity-interest rate hybrid model. Our modeling framework extends the Heston stochastic volatility model by including the Cox-Ingersoll-Ross stochastic interest rates and imposes correlation between the stochastic interest rate and volatility. It is known that one limitation of the hybrid models is that the analytical pricing formula is often unavailable due to the non-affinity property of hybrid models. An efficient semi-closed form pricing formula is derived for an approximation of the fully correlated hybrid model. Our pricing formula which involves solving two phases of three-dimensional partial differential equations is evaluated through numerical implementations to confirm its accuracy |
format |
Conference or Workshop Item |
author |
Roslan, Teh Raihana Nazirah Zhang, Wenjun Cao, Jiling |
author_facet |
Roslan, Teh Raihana Nazirah Zhang, Wenjun Cao, Jiling |
author_sort |
Roslan, Teh Raihana Nazirah |
title |
Valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates |
title_short |
Valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates |
title_full |
Valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates |
title_fullStr |
Valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates |
title_full_unstemmed |
Valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates |
title_sort |
valuation of discretely-sampled variance swaps under correlated stochastic volatility and stochastic interest rates |
publishDate |
2014 |
url |
http://repo.uum.edu.my/27990/1/ASM-02%201%208.pdf http://repo.uum.edu.my/27990/ |
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1687396254700535808 |