Semiclassical Pricing of Variance Swaps in the CEV Model

Araneda, Axel A.; Villena, Marcelo J.; Corazza, Marco; Perna, Cira; Pizzi, Claudio; Sibillo, Marilena

Keywords: Path integral, CEV model, Variance swap


Path integrals are a well-known tool in quantum mechanics and statistical physics. They could be used to derive the propagator or kernel of stochastic processes, analogous to solving the Fokker-Planck equation. In finance, they become an alternative tool to address the valuation of derivatives. Here, taking advantage of the hedging formula of the realized variance by means of the log contract, we use path integrals for the pricing of variance swaps under the Constant Elasticity of Variance (CEV) model, approximating analytically the propagator for the log contract by semiclassical arguments. Our results demonstrate that the semiclassical method provides an alternative and efficient computation which shows a high level of accuracy but at the same time lower execution times.

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Editorial: Springer
Fecha de publicación: 2022
Página de inicio: 25
Página final: 30