This paper analyzes tractable robust hedging strategies in diffusion-type models including stochastic volatility models. A robust hedging strategy avoids any losses as long as volatility stays within a given interval. It does not depend on the exact specification of the volatility process and...

This paper provides a theoretical and numerical analysis of robust hedging strategies in diffusion?type models including stochastic volatility models. A robust hedging strategy avoids any losses as long as the realised volatility stays within a given interval. We focus on the effects of...

We are concerned with the valuation of European options in Heston's stochastic volatility model with correlation. Based on Mellin transforms we present new closed-form solutions for the price of European options and hedging parameters. In contrast to Fourier-based approaches where the...

When using an Euler discretisation to simulate a mean-reverting square root process, one runs into the problem that while the process itself is guaranteed to be nonnegative, the discretisation is not. Although an exact and efficient simulation algorithm exists for this process, at present this...

This paper uses an extension of the equilibrium model of Lucas (1978) to study the valuation of options on the market portfolio with return predictability, endogenous stochastic volatility and interest rates. Equilibrium conditions imply that the mean-reverting of the rate of dividend growth...

We propose a direct and robust method for quantifying the variance risk premium on financial assets. We theoretically and numerically show that the risk-neutral expected value of the return variance, also known as the variance swap rate, is well approximated by the value of a particular...

This paper investigates the effect of closed overnight exchanges on option prices.During the trading day asset prices follow the literature s standard affine model which allows asset prices to exhibit stochastic volatility and random jumps.Independently, the overnight asset price process is...

The purpose of this paper is to introduce a stochastic volatility model for option pricing that exhibits Lévy jump behavior. For this model, we derive the general formula for a European call option. A well known particular case of this class of models is the Bates model, for which the jumps are...

This paper develops a new approach for variance trading. We show that the discretely-sampled realized variance can be robustly replicated under very general conditions, including when the price can jump. The replication strategy specifies the exact timing for rebalancing in the underlying. The...