Options on Realized Variance in Log-OU models

18 Pages Posted: 15 Mar 2010 Last revised: 7 Nov 2012

See all articles by Gabriel G. Drimus

Gabriel G. Drimus

Institute of Banking and Finance, University of Zürich

Date Written: October 1, 2011

Abstract

We study the pricing of options on realized variance in a general class of Log-OU stochastic volatility models. The class includes several important models proposed in the literature. Having as common feature the log-normal law of instantaneous variance, the application of standard Fourier-Laplace transform methods is not feasible. We derive extensions of Asian pricing methods, to obtain bounds, in particular, a very tight lower bound for options on realized variance.

Keywords: options on realized variance, Asian options, stochastic volatility

JEL Classification: C63, G13

Suggested Citation

Drimus, Gabriel G., Options on Realized Variance in Log-OU models (October 1, 2011). Applied Mathematical Finance, 19(5), 477-494, (2012). Available at SSRN: https://ssrn.com/abstract=1570591

Gabriel G. Drimus (Contact Author)

Institute of Banking and Finance, University of Zürich ( email )

Plattenstrasse 14
Zürich, CH-8032
Switzerland

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