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Title: Variance Swap with Mean Reversion, Multifactor Stochastic Volatility and Jumps
Authors: Pun, Chi Seng
Chung, Shing Fung
Wong, Hoi Ying
Keywords: Mean reversion
Variance swap
Multi-factor stochastic volatility
Jump diffusion
Issue Date: 2015
Source: Pun, C. S., Chung, S. F., & Wong, H. Y. (2015). Variance swap with mean reversion, multifactor stochastic volatility and jumps. European Journal of Operational Research, 245(2), 571-580.
Series/Report no.: European Journal of Operational Research
Abstract: This paper examines variance swap pricing using a model that integrates three major features of financial assets, namely the mean reversion in asset price, multi-factor stochastic volatility (SV) and simultaneous jumps in prices and volatility factors. Closed-form solutions are derived for vanilla variance swaps and gamma swaps while the solutions for corridor variance swaps and conditional variance swaps are expressed in a one-dimensional Fourier integral. The numerical tests confirm that the derived solution is accurate and efficient. Furthermore, empirical studies have shown that multi-factor SV models better capture the implied volatility surface from option data. The empirical results of this paper also show that the additional volatility factor contributes significantly to the price of variance swaps. Hence, the results favor multi-factor SV models for pricing variance swaps consistent with the implied volatility surface.
ISSN: 0377-2217
DOI: 10.1016/j.ejor.2015.03.026
Schools: School of Physical and Mathematical Sciences 
Rights: © 2015 Elsevier. This is the author created version of a work that has been peer reviewed and accepted for publication by European Journal of Operational Research, Elsevier. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [].
Fulltext Permission: open
Fulltext Availability: With Fulltext
Appears in Collections:SPMS Journal Articles

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