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PRICING VARIANCE SWAPS UNDER DOUBLE HESTON STOCHASTIC VOLATILITY MODEL WITH STOCHASTIC INTEREST RATE

Published online by Cambridge University Press:  05 January 2021

Huojun Wu Open the ORCID record for Huojun Wu [Opens in a new window] ,
Zhaoli Jia ,
Shuquan Yang  and
Ce Liu
Huojun Wu
Affiliation:
School of Mathematics, Hefei University of Technology, Hefei230009, China E-mails: [email protected]; [email protected]; [email protected]; [email protected]
Zhaoli Jia
Affiliation:
School of Mathematics, Hefei University of Technology, Hefei230009, China E-mails: [email protected]; [email protected]; [email protected]; [email protected]
Shuquan Yang
Affiliation:
School of Mathematics, Hefei University of Technology, Hefei230009, China E-mails: [email protected]; [email protected]; [email protected]; [email protected]
Ce Liu
Affiliation:
School of Mathematics, Hefei University of Technology, Hefei230009, China E-mails: [email protected]; [email protected]; [email protected]; [email protected]
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Abstract

In this paper, we discuss the problem of pricing discretely sampled variance swaps under a hybrid stochastic model. Our modeling framework is a combination with a double Heston stochastic volatility model and a Cox–Ingersoll–Ross stochastic interest rate process. Due to the application of the T-forward measure with the stochastic interest process, we can only obtain an efficient semi-closed form of pricing formula for variance swaps instead of a closed-form solution based on the derivation of characteristic functions. The practicality of this hybrid model is demonstrated by numerical simulations.

Keywords

double Heston hybrid modelgeneralized Fourier transformrealized variancevariance swap
Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 36 , Issue 2 , April 2022 , pp. 564 - 580
Copyright
Copyright © The Author(s), 2020. Published by Cambridge University Press

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