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Variance swaps under the threshold Ornstein–Uhlenbeck model

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  • Fangyuan Dong
  • Hoi Ying Wong

Abstract

Variance swap is a typical financial tool for managing volatility risk. In this paper, we evaluate different types of variance swaps under a threshold Ornstein–Uhlenbeck model, which exhibits both mean reversion and regime switching features in the underlying asset price. We derive the analytical solution for the joint moment generating function of log‐asset prices at two distinct time points. This enables us to price various types of variance swaps analytically. Copyright © 2017 John Wiley & Sons, Ltd.

Suggested Citation

  • Fangyuan Dong & Hoi Ying Wong, 2017. "Variance swaps under the threshold Ornstein–Uhlenbeck model," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 33(5), pages 507-521, September.
    • Handle: RePEc:wly:apsmbi:v:33:y:2017:i:5:p:507-521
    DOI: 10.1002/asmb.2252
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    Cited by:

    1. Yiru Xi & Hoi Ying Wong, 2021. "Discrete variance swap in a rough volatility economy," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(10), pages 1640-1654, October.
    2. Ben-Zhang Yang & Jia Yue & Nan-Jing Huang, 2019. "Equilibrium Price Of Variance Swaps Under Stochastic Volatility With Lévy Jumps And Stochastic Interest Rate," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(04), pages 1-33, June.

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