GARCH and Volatility swaps
This article discusses the valuation and hedging of volatility swaps within the frame of a GARCH (1,1) stochastic volatility model. First we use a general and flexible partial differential equation (PDE) approach to determine the first two moments of the realized variance in a continuous or discrete context. Next, and also the main contribution of the paper, is a closed-form approximate solution for the so-called convexity correction, when the risk-neutral process for the instantaneous variance is a continuous time limit of a GARCH (1,1) model. Following this, we provide a numerical example using S&P 500 data.
Year of publication: |
2004
|
---|---|
Authors: | Javaheri, Alireza ; Wilmott, Paul ; Haug, Espen |
Published in: |
Quantitative Finance. - Taylor & Francis Journals, ISSN 1469-7688. - Vol. 4.2004, 5, p. 589-595
|
Publisher: |
Taylor & Francis Journals |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Javaheri, Alireza, (2004)
-
Lautier, Delphine, (2003)
-
THE FORWARD PDE FOR EUROPEAN OPTIONS ON STOCKS WITH FIXED FRACTIONAL JUMPS
CARR, PETER, (2005)
- More ...