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A series-form solution for pricing variance and volatility swaps with stochastic volatility and stochastic interest rate

Journal Article


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Abstract


  • In this paper, we present analytical pricing formulae for variance and volatility swaps, when both of the volatility and interest rate are assumed to be stochastic and follow a CIR (Cox–Ingersoll–Ross) process, forming a Heston–CIR hybrid model. The solutions are written in a series form with a theoretical proof of their convergence, ensuring the accuracy of the determined swap prices. The application of the formulae in practice is also demonstrated through the designed numerical experiments.

Publication Date


  • 2018

Citation


  • He, X. & Zhu, S. (2018). A series-form solution for pricing variance and volatility swaps with stochastic volatility and stochastic interest rate. Computers and Mathematics with Applications, 76 (9), 2223-2234.

Scopus Eid


  • 2-s2.0-85054357293

Ro Full-text Url


  • https://ro.uow.edu.au/cgi/viewcontent.cgi?article=3003&context=eispapers1

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers1/1999

Number Of Pages


  • 11

Start Page


  • 2223

End Page


  • 2234

Volume


  • 76

Issue


  • 9

Place Of Publication


  • United Kingdom

Abstract


  • In this paper, we present analytical pricing formulae for variance and volatility swaps, when both of the volatility and interest rate are assumed to be stochastic and follow a CIR (Cox–Ingersoll–Ross) process, forming a Heston–CIR hybrid model. The solutions are written in a series form with a theoretical proof of their convergence, ensuring the accuracy of the determined swap prices. The application of the formulae in practice is also demonstrated through the designed numerical experiments.

Publication Date


  • 2018

Citation


  • He, X. & Zhu, S. (2018). A series-form solution for pricing variance and volatility swaps with stochastic volatility and stochastic interest rate. Computers and Mathematics with Applications, 76 (9), 2223-2234.

Scopus Eid


  • 2-s2.0-85054357293

Ro Full-text Url


  • https://ro.uow.edu.au/cgi/viewcontent.cgi?article=3003&context=eispapers1

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers1/1999

Number Of Pages


  • 11

Start Page


  • 2223

End Page


  • 2234

Volume


  • 76

Issue


  • 9

Place Of Publication


  • United Kingdom