Management Science and Financial Engineering

The Korean Operations Research and Management Science Society (한국경영과학회)
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Variance Swap Pricing with a Regime-Switching Market Environment

  • Received : 2013.03.08
  • Accepted : 2013.03.14
  • Published : 2013.05.31
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Abstract

In this paper we provide a valuation formula for a variance swap with regime switching. A variance swap is a forward contract on variance, the square of realized volatility of the underlying asset. We assume that the volatility of underlying asset is governed by Markov regime-switching process with finite states. We find that the proposed model can provide ease of calculation and be superior to the models currently available.

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References

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