Pricing Variance Swaps in a Hybrid Model of Stochastic Volatility and Interest Rate With Regime-switching
Cao, J; Nazirah Roslan, R; Zhang, W
MetadataShow full metadata
In this paper, we consider the problem of pricing discretely-sampled variance swaps based on a hybrid model of stochastic volatility and stochastic interest rate with regime-switching. Our modeling framework extends the Heston stochastic volatility model by including the CIR stochastic interest rate and model parameters that switch according to a continuous-time observable Markov chain process. A semi-closed form pricing formula for variance swaps is derived. The pricing formula is assessed through numerical implementations, and the impact of including regime-switching on pricing variance swaps is also discussed.