Volatility Derivatives in Market Models with Jumps

27 Pages Posted: 13 May 2009

See all articles by Harry Lo

Harry Lo

Imperial College London

Aleksandar Mijatovic

Imperial College London

Date Written: May 13, 2009


It is well documented that a model for the underlying asset price process that seeks to capture the behaviour of the market prices of vanilla options needs to exhibit both diffusion and jump features. In this paper we assume that the asset price process S is Markov with càdlàg paths and propose a scheme for computing the law of the realized variance of the log returns accrued while the asset was trading in a prespecified corridor. We thus obtain an algorithm for pricing and hedging volatility derivatives and derivatives on the corridor-realized variance in such a market. The class of models under consideration is large, as it encompasses jump-diffusion and Levy processes.

Keywords: volatility derivatives, Marov processes

Suggested Citation

Lo, Harry and Mijatovic, Aleksandar, Volatility Derivatives in Market Models with Jumps (May 13, 2009). Available at SSRN: https://ssrn.com/abstract=1403959 or http://dx.doi.org/10.2139/ssrn.1403959

Harry Lo

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Aleksandar Mijatovic (Contact Author)

Imperial College London ( email )

Department of Mathematics
180 Queen's Gate
London, SW7 2AZ
United Kingdom

HOME PAGE: http://www3.imperial.ac.uk/people/a.mijatovic

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