Volatility Markets: Consistent Modelling, Hedging and Practical Implementation (Dissertation)

Abstract

This is the revised version of my dissertation.

The dissertation covers pricing and hedging of volatiluty derivatives, but also a few other topics.

It contains extended material on consistent variance curves, a proof that "smooth" diffusion markets are always complete, comments on pricing in local martingale models, fitting models to the market (general, Bergomi, Dupire, Heston), Heston-type models with semi-closed forms, algorithms to perform parameter hedging with linear programming, computation of variance, gamma and entropy swaps, expensive martingales, and the implementation of a particular four-factor variance curve model.

This updated version of the dissertation incorporates further results presented since the publication of the thesis itself, in particular on the subject of "fitted models".

Keywords: Variance Swaps, Consistent Variance Curve, Hedging, Complete Market, Gamma Swaps, Fitted Heston

JEL Classification: D89