Pricing Variance Swaps for the Discrete Bn-s Model
Year: 2024
Type: article
Abstract: We introduce a discrete Barndorff-Nielsen and Shephard (BNS) stochastic volatility model, where the non-Gaussian Ornstein-Uhlenbeck process governs the instantaneous variance of an underlying asset. A closed-form solution for pricing variance swaps in financial markets driven by a BN-S type Levy process is derived. Additionally, we propose a discrete-time framework for arbitrage-free pricing of variance swaps, supported by simulations that provide numerical validation of our results. The model fitting and parameter estimation processes are also discussed in detail.
Source: Journal of Stochastic Analysis
DOI: 10.31390/josa.5.3.01
Author: Semere Gabresilasie
Institution: Wentworth Institute of Technology
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4407507898