Simulation of Stochastic Volatility Variance Swap
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.
KeywordsVariance swaps Time-scale Stochastic volatility Finite element method
This research work is supported by Humanities and Social Science fund of Chinese Ministry of Education (17YJC630236).
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