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Arbitrage Bounds for Prices of Weighted Variance Swaps

Abstract:

We develop robust pricing and hedging of a weighted variance swap when market prices for a finite number of co--maturing put options are given. We assume the given prices do not admit arbitrage and deduce no-arbitrage bounds on the weighted variance swap along with super- and sub- replicating strategies which enforce them. We find that market quotes for variance swaps are surprisingly close to the model-free lower bounds we determine. We solve the problem by transforming it into an analogous ...

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Publication status:
Published

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Publisher copy:
10.1111/mafi.12021

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Institution:
University of Oxford
Division:
MPLS
Department:
Mathematical Institute
Role:
Author
Journal:
MATHEMATICAL FINANCE More from this journal
Volume:
24
Issue:
4
Pages:
821-854
Publication date:
2010-01-15
DOI:
ISSN:
0960-1627
Keywords:
Pubs id:
pubs:189133
UUID:
uuid:1b164b05-ae30-47e4-b821-105cfefc8d0c
Local pid:
pubs:189133
Source identifiers:
189133
Deposit date:
2012-12-19

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