RIS ID
38113
Abstract
Analytic solutions are found for prices of both variance and volatility swaps and VIX options under new 3/2- stochastic models for the dynamics of the underlying assets. The main features of the new stochastic differential equations are an empirically validated cv3/2 diffusion term, a nonlinear drift providing a balancing effect of a stronger mean reversion with high volatility, and for the case of the variance and volatility swaps, a free function of time as a moving target in the reversion term, allowing additional flexibility for model calibration against market data.
Publication Details
Goard, J. (2011). Pricing of volatility derivatives using 3/2-stochastic models. In S. I. Ao, l. gelman, d. WL. hukins, A. Hunter & a. m. korsunsky (Eds.), World Congress on Engineering 2011 (pp. 433-438). London: Newswood.