The Journal of Computational Finance, Forthcoming
33 Pages Posted: 4 Nov 2010 Last revised: 10 Aug 2014
Date Written: July 1, 2014
The values of options on realized variance are significantly impacted by the discrete sampling of realized variance and may be substantially higher than the values of options on continuously sampled variance (or, quadratic variation). Under arbitrary stochastic volatility dynamics, we analyze the discretization effect and obtain a simple analytical correction term to be applied to the value of options on continuously sampled variance. Our final result is remarkably compact and allows for a straightforward implementation in many of the standard stochastic volatility models proposed in the literature.
Keywords: options on realized variance, variance swaps, stochastic volatility, Monte Carlo
JEL Classification: C63, G13
Suggested Citation: Suggested Citation
Drimus, Gabriel G. and Farkas, Walter and Gourier, Elise, Valuation of Options on Discretely Sampled Variance: A General Analytic Approximation (July 1, 2014). The Journal of Computational Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1700151 or http://dx.doi.org/10.2139/ssrn.1700151