Multi-asset stochastic local variance contracts

Peter Carr, Peter Laurence

Research output: Contribution to journalArticlepeer-review

Abstract

Variance swaps now trade actively over-the-counter (OTC) on both stocks and stock indices. Also trading OTC are variations on variance swaps which localize the payoff in time, in the underlying asset price, or both. Given that the price of the underlying asset evolves continuously over time, it is well known that there exists a semirobust hedge for these localized variance contracts. Remarkably, the hedge succeeds even though the stochastic process describing the instantaneous variance is never specified. In this paper, we present a generalization of these results to the case of two or more underlying assets.

Original languageEnglish (US)
Pages (from-to)21-52
Number of pages32
JournalMathematical Finance
Volume21
Issue number1
DOIs
StatePublished - Jan 2011

Keywords

  • Basket option
  • Stochastic volatility
  • Variance swap

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Applied Mathematics

Fingerprint Dive into the research topics of 'Multi-asset stochastic local variance contracts'. Together they form a unique fingerprint.

Cite this