Economics, Econometrics and Finance
4 years ago

New pricing model revolutionizes variance swaps with hybrid stochastic approach!

Probability in the Engineering and Informational Sciences
PRICING VARIANCE SWAPS UNDER DOUBLE HESTON STOCHASTIC VOLATILITY MODEL WITH STOCHASTIC INTEREST RATE
Huojun Wu, Zhaoli Jia, Shuquan Yang, Ce Liu

Paper Summary

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The article discusses how to price variance swaps using a mix of two stochastic models. By combining a double Heston stochastic volatility model with a Cox–Ingersoll–Ross stochastic interest rate process, the researchers developed a semi-closed pricing formula for variance swaps. This hybrid model was shown to be practical through numerical simulations.