Pricing variance swaps under the Hawkes jump-diffusion process

Authors

Weiyi Liu, Capital University of Economics and Business
Song-Ping Zhu, University of WollongongFollow

RIS ID

132870

Publication Details

Liu, W. & Zhu, S. (2019). Pricing variance swaps under the Hawkes jump-diffusion process. Journal of Futures Markets, 39 (6), 635-655.

Abstract

This paper presents an analytical approach for pricing variance swaps with discrete sampling times when the underlying asset follows a Hawkes jump-diffusion process characterized with both stochastic volatility and clustered jumps. A significantly simplified method, with which there is no need to solve partial differential equations, is used to derive a closed-form pricing formula. A distinguished feature is that many recently published formulas can be shown to be special cases of the one presented here. Some numerical examples are provided with results demonstrating that jump clustering indeed has a significant impact on the price of variance swaps.