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- Publisher
- Cambridge University Press
- Copyright
- © The Author(s), 2022. Published by Cambridge University Press on behalf of Australian Mathematical Publishing Association Inc.
- ISSN
- 1446-8735
- eISSN
- 1446-1811
- DOI
- 10.1017/S144618112200013X
- Publisher site
- See Article on Publisher Site
Abstract
Abstract We consider the pricing of discretely sampled volatility swaps under a modified Heston model, whose risk-neutralized volatility process contains a stochastic long-run variance level. We derive an analytical forward characteristic function under this model, which has never been presented in the literature before. Based on this, we further obtain an analytical pricing formula for volatility swaps which can guarantee the computational accuracy and efficiency. We also demonstrate the significant impact of the introduced stochastic long-run variance level on volatility swap prices with synthetic as well as calibrated parameters.
Journal
The ANZIAM Journal – Cambridge University Press
Published: Jul 1, 2022
Keywords: 91G20; volatility swaps; modified Heston model; risk-neutralized volatility; stochastic long-run variance; analytical solution