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Analytically pricing volatility swaps under stochastic volatility

Journal Article


Abstract


  • © 2015 Elsevier B.V. All rights reserved. Papers focusing on analytically pricing discretely-sampled volatility swaps are rare in literature, mainly due to the inherent difficulty associated with the nonlinearity in the pay-off function. In this paper, we present a closed-form exact solution for the pricing of discretely-sampled volatility swaps, under the framework of Heston (1993) stochastic volatility model, based on the definition of the so-called average of realized volatility. By working out such a closed-form exact solution for discretely-sampled volatility swaps, this work represents a substantial progress in the field of pricing volatility swaps, as it has: (1) significantly reduced the computational time in obtaining numerical values for the discretely-sampled volatility swaps; (2) improved the computational accuracy of discretely-sampled volatility swaps, comparing with the continuous sampling approximation, especially when the time interval between sampling points is large; (3) enabled all the hedging ratios of a volatility swap to be analytically derived.

Publication Date


  • 2015

Citation


  • Zhu , S. & Lian, G. (2015). Analytically pricing volatility swaps under stochastic volatility. Journal of Computational and Applied Mathematics, 288 332-340.

Scopus Eid


  • 2-s2.0-84929324084

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/4544

Has Global Citation Frequency


Number Of Pages


  • 8

Start Page


  • 332

End Page


  • 340

Volume


  • 288

Place Of Publication


  • Netherlands

Abstract


  • © 2015 Elsevier B.V. All rights reserved. Papers focusing on analytically pricing discretely-sampled volatility swaps are rare in literature, mainly due to the inherent difficulty associated with the nonlinearity in the pay-off function. In this paper, we present a closed-form exact solution for the pricing of discretely-sampled volatility swaps, under the framework of Heston (1993) stochastic volatility model, based on the definition of the so-called average of realized volatility. By working out such a closed-form exact solution for discretely-sampled volatility swaps, this work represents a substantial progress in the field of pricing volatility swaps, as it has: (1) significantly reduced the computational time in obtaining numerical values for the discretely-sampled volatility swaps; (2) improved the computational accuracy of discretely-sampled volatility swaps, comparing with the continuous sampling approximation, especially when the time interval between sampling points is large; (3) enabled all the hedging ratios of a volatility swap to be analytically derived.

Publication Date


  • 2015

Citation


  • Zhu , S. & Lian, G. (2015). Analytically pricing volatility swaps under stochastic volatility. Journal of Computational and Applied Mathematics, 288 332-340.

Scopus Eid


  • 2-s2.0-84929324084

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/4544

Has Global Citation Frequency


Number Of Pages


  • 8

Start Page


  • 332

End Page


  • 340

Volume


  • 288

Place Of Publication


  • Netherlands