Variance Swaps on Time-Changed Markov Processes

Tuesday, June 12, 2018 - 10:00am - 10:50am
Lind 305
Roger Lee (University of Chicago)
We prove that a variance swap has the same price as a
co-terminal European-style contract, when the underlying
is a Markov process, time-changed by a general continuous
stochastic clock, which is allowed to have general
correlation with the driving Markov process, which is allowed
to have state-dependent jump distributions. The
European contract’s payoff function satisfies an ordinary
integro-differential equation, which depends only on the
dynamics of the Markov process, not on the clock. In some
examples, the payoff function that prices the variance swap
can be computed explicitly. Joint work with Peter Carr and
Matt Lorig.