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Simulation of Stochastic Volatility Variance Swap

In: Recent Developments in Data Science and Business Analytics

Author

Listed:
  • Shican Liu

    (Department of Mathematics and Statistics Curtin University
    Zhongnan University of Economics and Law)

  • Yanli Zhou

    (School of Finance, Zhongnan University of Economics and Law)

  • Yonghong Wu

    (Department of Mathematics and Statistics Curtin University)

  • Xiangyu Ge

    (Zhongnan University of Economics and Law)

Abstract

This paper aims to propose efficient mathematical model of variance swap to study the effect of stochastic volatility in different time-scales on the option pricing. Two types of stochastic volatility, including Ornstein-Uhlenbeck (OU) process and Cox-Ingersoll-Ross (CIR) process are considered. Analytical solution of CIR model is presented. For the OU process, a numerical algorithm based on the finite element approach is established for solution of the model.

Suggested Citation

  • Shican Liu & Yanli Zhou & Yonghong Wu & Xiangyu Ge, 2018. "Simulation of Stochastic Volatility Variance Swap," Springer Proceedings in Business and Economics, in: Madjid Tavana & Srikanta Patnaik (ed.), Recent Developments in Data Science and Business Analytics, chapter 0, pages 139-147, Springer.
    • Handle: RePEc:spr:prbchp:978-3-319-72745-5_15
    DOI: 10.1007/978-3-319-72745-5_15
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    Cited by:

    1. Nathan E. Wilson, 2021. "The Impact of Competition on Investment: Evidence From California Hospitals," Journal of Industrial Economics, Wiley Blackwell, vol. 69(1), pages 1-32, March.

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