Pricing variance swaps on time-changed Markov processes

We prove that the variance swap rate (fair strike) equals the price of a co-terminal European-style contract when the underlying is an exponential Markov process, time-changed by an arbitrary continuous stochastic clock, which has arbitrary correlation with the driving Markov process, provided that the payoff function G of the European contract satisfies an ordinary integro-differential equation, which depends only on the dynamics of the Markov process, not on the clock. We present examples of Markov processes where the function G that prices the variance swap can be computed explicitly. In general, the solutions G are not contained in the logarithmic family previously obtained in the special case where the Markov process is a Lévy process.